8: Rent VS Buy

To see the examples in the episode checkout the free corresponding course https://moneyforaveragejoes.com/course/rent-vs-buy/ Only transcription below
Welcome to money for average Joe’s. A 12 part series on personal finance. I’m your host, Jason Weaver, an average Joe. Today’s episode episode eight is deciding when is it time to rent? And when is it time to buy. I always pull from the best podcasts and online resources out there. So today I’ve assembled a checklist for you a mathematical formula that can help you shortcut things a little bit, and some suggestions on your mortgage duration and payment plans should you decide to move forward with getting a home and as a quick refresher, Episode Seven was all about how to pick the best college or education for yourself and how to pay for it. Because when you can make some more money you can have better choices when it comes to your living situation. And of course all this is so you can live better and have more money for when it matters most. All the Guru’s agree it’s not very controversial. It’s just a fact. When you go to get financing to buy a home, you will find out that the banks are willing to give you a way too much money you should not buy a home for the amount that they’re willing to finance you for. It is a death trap. And it’s called being house poor, where you have too much money and into your home. So you can’t afford even furniture inside or everyday emergencies or anything else like that. So there’s some good rules of thumb that I’m going to cover for you. And one thing that is a little controversial for people is whether you should buy a house that you can grow into over the next five years, or buy the most affordable home you can stand or, you know, just rent for a while. So hopefully, you’ll feel a little more comfortable as I go through this with you so that you can make those decisions. So here’s a quote from the free personal finance course put on by the Church of Jesus Christ of Latter Day Saints. For long term financial stability, your monthly mortgage payment should not exceed 25% of your monthly income. And then you can use that same rule of thumb for renting as well. Even if you have to roommate up and you know in other cases Trees and also in the bigger cities in the United States, that’s actually very common now for couples to have a roommate up to, because you might not make enough, especially in your younger years, right? So I’ve got this also helpful checklist from the church. And let’s go through it to see if you can take all these off and decide whether you should buy a home or not. Am I free from consumer debt? Do I have a three to six month emergency fund?

2:28
Am I living on a budget? That’s hard for many people? Do I know how much payment I can comfortably afford? Stick that 25% rule and factor in the fact that you have to pay for your own trash and electricity and all that stuff inside that 25% if possible? Have I saved enough money for a down payment? And we’ll talk about that at the end. What how much is that? Do I have stable employment? That one’s always tough, right? And this one might be one of the toughest ones of all do. I plan on I own the home for at least five years. Now, there’s plenty of times where you buy a house and the market just goes up, up, up, up. And it was great. But for the most part, you can’t time the market when you buy a home. And so things seem to level be okay, on average over five years. So the worst thing is your house value goes down, you need to move within a year, and then you got to take that hit when you sell your home in multiple ways. And it really compounds It’s terrible. So a lot of people end up having to rent their house, you know, instead of sell it.

3:36
And then the last one on the checklist is can I afford the additional cost of maintaining and insuring my home and paying property taxes. So that one’s pretty important, of course, and that one’s a little hard. So you might have to ask around how much property tax people are paying or insurance and whatnot, but you can figure it out. Or guesstimate. I’m sure there’s some good online resources too, out there that can guesstimate what you’re you would pay And here’s another quote from the churches resources. When you own a home, you’re responsible for the maintenance, things break, were out and sometimes need updating. Financial Advisors generally recommend saving at least 1% of the houses value. And I paraphrased a little bit paraphrased for maintenance. Okay.

4:24
Before I dive deeper, I want to mention my bonus opportunity for you. So essentially money for average Joe’s comm slash bonus has an opportunity for a one hour clarity call with myself. We basically go over, you know, like a coach helping you. We go over. Where are you at on this financial roadmap? Have you missed anything along the way, and then we get out the one page money goal worksheet, and you can basically in each one of these categories, set a goal either with yourself or your spouse, right as well. And you can you know, start sharing up where you’ve missed things. On your roadmap, and also set some goals, including even vacation goals if you want to. And that way you can be able to feel more confident about where you are now where you’re going and start making progress. But I’ve also just created a money resource page so it’s money forever shows.com slash money dash resource is so as an S, and on that page and if you just go to money for average Joe’s dot com, you can get to both those pages in the menu as well. I have all these great resources where do I feel like this podcast and the course that I’ve created fill in the gap on your on your money, knowledge and education? And then where are some other great resources gurus, helpful people, where can they fill in some gaps for you on specific needs? Or also just like, you know, are you you know, have Do you have several of these things ticked off, you know, and then one thing I thought it was really helpful as I read the book, money Your money or your life. And, you know, I’ll have to say just in general that it’s a little political or controversial in some ways of you know how you have to live your life and reduce your footprint and things like that. But as far as money management and advice superbe, and I hadn’t actually thought of this or realized, and I can’t believe I haven’t already, but they gave this idea of charting your income, from your job income from your investments, your expenses, and I’m assuming you’re debt if you’re stuck in that situation as well. And seeing if you can grow the gap between your income and expenses, that’s your saving rate or ability to invest, right? And also, of course, if you’re stuck in debt, if you can get that to go down faster. You can just see monthly charts every month. See, where are you are you making some progress? Are you struggling a little bit, that’s great, but, you know, are you still working at it? It obviously helps you you know, focus on where we’re at. You are now where you want to go. And then of course, there’s always that crossover point everybody talks about, hey, if my investments make more money than what I spend as expenses, then I technically have what’s called financial freedom. And, you know, some people in the fire movement, for instance, wants to retire early. And so I have some other great resources on there, like two cents from PBS does a YouTube series, that’s great, you might see that I intertwine some of that throughout the course as well. Because education is really superb and awesome. In my opinion, it’s all fire movement, methodology and mentality but still very, along the same lines of what I believe in what helps people in general and what’s been proven for many, many years. And so you should definitely check out the money resources. And if you’re lost or you want to just check in and see where you’re at, you should check out the bonus for the one hour clarity call as well. And then I should just mention in general, I am not a affiliated with the Church of Jesus Christ of Latter Day Saints, Dave Ramsey, or anybody else I mentioned on the show, these are just some of the great resources that I found I’m going to share with you. And then in general, you, you, if you have a spouse, you have to take a course with your spouse, whether it’s put on by Dave Ramsey for some money, or it’s free from the Church of Jesus Christ of Latter Day Saints, or you find another one that’s great out there. Because you have to kind of get in alignment with your spouse, and you have to then take the resources that I share, and others or share and kind of work those into that core of that communication with your spouse and agreement on your plan. So, this might be a touchy subject for some a bit controversial. But when you get financing for a home and you don’t actually pay for the home, 100% down with cash, which some people are able to do and is a really great idea if you can do that even suffer for a few years and then do that

8:54
it’s really, really great for you financially. But some people misunderstand why people are trying to push you into a 15 year mortgage so, so much. And it’s because you’re gonna pay a lot of interest in the very first few years that you’re paying on your mortgage, most of what you pay is going straight to interest isn’t paying down your debt, which means that’s more interest that you have to pay over a longer period of time and it is very significant. If you crunch the numbers with any mortgage calculator or finance

9:26
planner or anybody or coach like myself, you’re going to see that the numbers are really going to hurt you, the longer that you’re into this, but a 15 year mortgage is not for everybody. So the Church of Jesus Christ of Latter Day Saints unlike Dave Ramsey is saying, you can pay a little bit extra on your mortgage every month. If you want to know Dave’s gonna come back and say hey, most people don’t do that. I think most people don’t do that because they don’t know about it. And they don’t make it automatic. Like when I set up my house payment. I just was always paying something like $90 more a month to round up. It really didn’t hurt me much financially. But for my mortgage, it’s gonna shave off like, I don’t know, five years of that 30 year mortgage. And so I’m hoping here when my debts all gone, in a couple months, all my card debt will be gone, all my consumer debts gone. And then all I have left is just this house to pay for with my wife and kids. Then we want to start paying a little bit more maybe $200 a month more on our mortgage, which was shave off a couple more years. So we won’t have done the the 15 year plan. But even if it’s 18 years that saves us incredible amount of money, right? And so one thing that’s also helpful to understand is there are some guides out there and money calm created a really really cool guide. I think it’s awesome. It’s interactive, state by state, and in my state of Idaho, I was able to click on it. The the resource or article is called the salary you need to buy a home or the salary you need. To buy an average home in every state, and I’ll include that link. If you go to the course and get access to it on money for average Joe’s calm. And for Idaho, it says you need an income of $70,780 on average between you and your spouse. The median income in Idaho is less than 60,000. And the median home price is $314,000. Now I live in more rural rural part of Idaho. So my medium income, it home price is actually less than that. But you might just keep those kind of numbers in mind when you’re looking at home prices and whether you can afford it because that can be really helpful when making that decision as well. I promised a shortcut formula

11:52
to help you decide whether you should rent or buy and you might have noticed by the end of the show, we’re not done yet but pretty close. That is I haven’t talked much about renting. Okay. And there’s a lot that could go on there. But I think most people at some point in their life are going to want to buy. And I just want to help you feel more secure or understand all the things that I even missed before I buy a home. And I wish I had checked checked off everything on that checklist. But at least one thing I had in my favor is this thing called the price to rent ratio. I learned about it from money therapy, comm two cents, has done a really amazing video that includes, you know, this same ratio, that’d be helpful. And essentially, here’s an example I won’t even give you the formula because it’s way easier to understand and an example. So say you want to buy a home, as you know whether it’s four bedrooms or whatever you figure it out for $200,000 Okay. Then you go and look online and say what would it cost for me to rent a hit a similar home, that’s four bedrooms or whatever, two baths similar home right? So it’s basically 200,000 divided by $1,000 a month in rent, right? times 12. So if you’re doing the math equation, you do 1000 times 12, that’s, you know, $12,000 and you take the 200,000 divided by 12. And what that equals is 16.6. And then there’s this little kind of like, key that you need to go back to and reference Okay, if I’m a 16.6, then I’m right on the edge basically, of Should I rent or should I risk a buy, okay? And so you’re you’re in the middle, at that point in your you’re closer towards better to buy than rent at that situation. So the key is one to 15. Better to buy in most situations, as long as you’re planning on being there, five years right on average, and then if you’re in that middle land, where most people are going to be stuck 16 to 2020 being the closest to it’s better to rent right? than by 16 being the closest to, it’s better to buy than rent, then you’re gonna have to make a tougher decision. The numbers don’t really speak in your favor, right? And then, you know, 21 or more, it’s very clear, I think at that point, it’s better to rent than buy and this may not completely make sense to you. There’s other podcasts I’ve listened to that’s kind of helped me understand this as well. But, you know, like, take a bigger city. The prices for renting, don’t always go up. And sometimes they’re regulated. I’m originally from Portland, Oregon, I’ve heard now as regulated they can only increase their rent so much, but home values are based on perception. Right? And those values can go way, way, way up. Whereas rent doesn’t always go at the same rate or can’t now that’s regulated, right? And so that works in your favor to rent and hurts you when buying, right? So this ratio can be used nationwide anywhere and can help you understand, okay, look, this is, I mean, if you’re on that checklist and you run this, and it says you need to rent and the checklist is like I’ve only done three out of those seven things or whatnot, then it’s clear as don’t buy you have to rent, right? but also on money therapy, there’s a couple other good rules of thumbs out there. And it’s kind of hard to find all the rules of thumbs for this because there’s so controversial but be prepared to factor in two to 5%. For closing costs to buy a house, Home Inspection might be 300 $400. By the time you do it, I don’t know. It’s not too expensive, but you can you’re going to need that much. And then plan to put 10 to 20% of home value down To avoid being underwater, okay. And that comes from Scott Allen Turner calm

16:09
is a great resource as well. And then another thing from Scott is a for a mortgage payment that’s 15 to 20% lower than your current rent. That is also a good rule of thumb because you’re going to have to pay for more things. And excuse me that comes from grow acorns comm not Scott Allen Turner, though he has great resources as well.

Transcribed by https://otter.ai