When Homebuying Is A Waste of Money: Five Smart Moves

By: John Wasik

Article reposted with permission from John Wasik.

when-renting-is-better-than-buyingFor many Americans, home buying is simply a waste of money.

You could spend years paying thousands of dollars of interest on a mortgage, never reap the full tax benefits and never see enough appreciation to make it worthwhile.

Home ownership is one of the great myths of the American dream. But there’s nothing wrong in having a home. Buying it may not make the most financial sense.

A recent study by Morningstar’s HelloWallet, the Chicago-based financial research firm, showed that where you’re considering of buying makes the difference in your decision. (Disclosure: I freelance for Morningstar.com)

Much of the decision in homebuying should be dictated by the “rent-to-price” ratio. This comparison shows you when it makes sense to rent instead of buy.

In some cities, for example, renting may be the only option because home prices are stratospheric: Think San Francisco, New York and Boston. Other cities, though, may offer a plethora of bargains such as Memphis, St. Louis and Cleveland, Dayton and Toledo Ohio.

“While there is no question that homes have become the most valuable asset for U.S. households, our research finds that homeownership is often not the best strategy for building wealth,” said Matt Fellowes, founder and CEO of HelloWallet and a former scholar at the Brookings Institution.

He added: “Workers need to take a hard look at other investment choices before deciding to buy a home. Employer-sponsored retirement or health savings programs, 529 college savings plans, or even IRAs may be more effective vehicles for families to build wealth and get ahead.”

When It’s Best to Rent

  • You may not reap the full benefits of tax write-offs for taxes and mortgage interest.That’s a signal that renting is wise. Median income homeowners realize no federal tax benefit in 75 percent of major cities.
  • You have to look at the local price cycle.Many homebuyers purchase at the top of the market and won’t reap appreciation from the past. More than half of current homeowners, or more than 40 million households, purchased their homes during time periods when average homebuyers would have been better off renting and investing.
  • Don’t overstate the benefits of buying.Many popular, free, online “buy-or-rent” calculators inflate the benefits of home buying. The study shows that calculators provide inaccurate guidance to more than 90 percent of renters considering whether to buy a home by overestimating tax benefits and underestimating the returns an individual can earn by investing.
  • Do the math.Prospective home buyers should calculate their “rent-to-price” ratio, or the ratio of the annual rental costs of a home compared with its purchase price, to determine whether to by a home or rent and invest.
  • What’s Your Bottom Line? If the rent-to-price ratio is 5% or less, people may be better off renting and investing any savings. If the rent-to-price ratio is greater than that, they may be better off buying a house.

If you have a yen to own a home, just keep in mind that ownership also entails property tax and maintenance. In growing areas, taxes are likely to rise to build schools, fire stations, libraries, etc.

Single family homes also need new roofs, furnaces and interior repairs. If you’re unable to set aside 2% annually of the value of your home’s mortgage, you won’t be able to keep up with maintenance.

Of course, in some areas, especially in areas hard hit by the housing bust, you may be able to find a screaming bargain. A fixer-upper also may be a worthwhile investment.

But almost no property that’s undervalued can realize a quick gain without a capital or time investment on your part.You still have to calculate your return on investment when all costs are deducted. Generally you can expect no more than the rate of inflation for an appreciation rate — unless you’re in a high-growth, high employment market.

There’s still no free lunch in homeownership. The “flipper” days flopped about six years ago.

John Wasik is the author of Keynes’s Way to Wealth and 13 other books. He writes and speaks about investing across the globe. Follow him on Twitter and Facebook

 

To view the original contribution, please visit: www.Forbes.com

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