Why should we buy real estate?
Stability; (start a family, plant routes) As lifelong renters, Suzanne and Stephen bought a home in the suburbs last year, hoping that their newborn son would grow up and go through the school system in the same community. Now in their late twenties, these millennials are ditching their desire to be close to the city and all its energy for what they believe will be a comfortable life in the suburbs. At 34% of the market share, Millennials make up the largest demographic of home buyers. Furthermore, The National Association of Realtors have indicated that 57% are buying in the suburbs.
Being part of a community provides the opportunity to spread your knowledge and skills and become a part of something bigger. They have found that their neighbors have similar passions and concerns for their community, and tend to look after each other much like an extended family.
Investment; A few generations ago, the goal was to buy a property and pay off the mortgage by the time you retire and live mortgage free. I think of purchasing a house today as a large savings account with the additional bonus of appreciation. Since 1980, Los Angeles has seen average real estate appreciation of 4.9% annually with many peaks and valleys along the way. Since most of us mistime the market, for this example we have reduced the appreciation to 2.45% (half of the historical rate). https://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20
Let’s do the math. The median rent for a 2 bedroom apartment in Los Angeles is $3,071. (https://www.abodo.com/blog/midyear-rent-report/) Assume this covers utilities and you pay an additional $40 per month for renters insurance (similar to a home owners policy). Your initial monthly rent plus insurance would be $3,111. Now assume that your annual rent increases with inflation at 2.128%, which is the average CPI over the past 20 years. (http://www.inflation.eu/inflation-rates/united-states/historic-inflation/cpi-inflation-united-states.aspx). You will have paid $1,591,680 in rent over 30 years.
In contrast, if you buy a 3 bed & 2 bath property in Los Angeles for $575,000 (https://www.realtor.com/realestateandhomes-detail/17408-Hemmingway-St_Northridge_CA_91325_M22287-37859) and have the ability to put 10% down ($57,500) your monthly mortgage payments would be $2,547 + $678 in taxes and insurance. When you anticipate an additional $450 per month in maintenance and utilities cost, your total housing expense is $3,675. While your property tax and utilities will increase at 1% per year on average, your mortgage payments remain the same. We have not taken into consideration the mortgage interest deduction or property tax deduction from your income taxes since the new tax plan increased the standard deduction and most will no longer itemize their property deductions.
Renting Highlights
• As a result of inflation, your 8th year renting would cost about the same as buying a house ($3,688)
• After 30 years, adjusting for inflation you have paid $1,591,680
• If you invested $57,500 instead of using these funds as a down payment and earned returns at 5%, you would have $256,895.
• No unexpected large repair cost
Buying Highlights
• After 30 years, adjusting for 1% annual property tax and utility cost increase you have paid $1,338,000 ($253,680 less than renting)
• You most likely will have some deferred maintenance that’s not covered under insurance (new roof, new landscape, etc) that could cost $20,000 – $70,000.
• You no longer have a mortgage payment
• You have an asset valued at $1,198,253
The king of your own castle; When purchasing a property, you are not subject to a rent increase, lease termination, or changes in property management guidelines. As long as you abide by the local and state laws, you decide what goes on in your house. You can rent a room for additional income, have pets, even entertain guests without concern that a property manager will penalize you or worse, evict you. Whether it’s a “man cave”, an entertainer’s backyard, a media room, or you simply want to work on that classic car in the garage, you will have the freedom to design your house as you desire.
Feeling of being at home; (make yourself at home) Houses get bought and sold but a home always stays with you. The sensation of peace on a cozy, rainy Sunday; the feeling of relief when you pull into the driveway after a long trip; a quiet kiss on the head of a baby asleep in your lap; and the warmth you feel in the arms of your spouse will resonate in a home. Celebrating the holidays with the extended family or summertime barbecues at your house will provide the foundation for unforgettable memories. Suzanne and Stephen can’t wait to teach their son how to ride a bike, catch a baseball, and build a treehouse in the front yard of their house.
After considerable thought and reflection, unless you are concerned about planting routes and having a lack of instant mobility, there is no reason why you shouldn’t get in the real estate market today. I have found the quickest and most comprehensive way to learn the maximum you can afford today is online at PreApprovalCenter.com.