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In every Latino or Hispanic family, from the moment we are born we have been taught that the most important thing we can all have is a roof over our own.
This, in addition to giving you peace of mind, is your best investment, and on the other hand, it has always been said that paying for rent is synonymous with wasting your money.
Since you would be paying for someone else to earn money while you rather have nothing.
Now, let’s delay this thought and answer that big question:
Does it make sense to rent a home? Is it always better to buy a house?
Of course, the first challenge we encounter in answering these questions is the extraordinary increase in housing rental fees in the United States.
During the years 2021 and 2022, this increase is 49.8% in Miami, according to a report by realtor.com and averaging almost 20% nationally and the worst thing is that real estate specialists say that this trend will be prolonged.
On the other hand, we see that mortgage rates are beginning to rise significantly, remembering that in January 2021 they reached their historical low of 2.65%.
Which had not been seen in the last 50 years, but by April 2022, it had risen much more than 4%.
Likewise, the Federal Reserve has clearly communicated that it is going to continue raising interest rates in order to put a stop to the high inflation that is being experienced in the USA.
With which fewer people will have the possibility of accessing the purchase of a home since the monthly installments of the mortgage payment will no longer be so cheap.
So, since mortgages are going to get more expensive, we can think:
Will house prices go down?
According to a report by Bank of America, there is no hope that in the short term the price of housing will tend to fall substantially because there is still a deficit of some 5 million homes.
Many millennials no longer want to live with their parents and production lines worldwide are still affected by the effect of the pandemic and the war with Ukraine.
So more is thought until they could keep going up a little more.
After reading this, many might say: you see why it is better to buy your home and not waste money paying rent, but we are going to give you 6 keys so that you can make this decision on a more informed basis and not simply because it is something that is always we have been told in our families that “renting is bad”.
1.- Is renting throwing money away?
To answer this question we want to ask you the following question:
When you ask for a rented vehicle, do you feel like you are wasting your money?
In many cases the most usual answer would be, of course not because I’m paying to use someone else’s car for a while so I can get around town and do all the things I need to.
Well, in the case of renting a home, it happens in the same way, you are paying for one of the most important needs of the human being, which consists of having a roof to sleep, live and be with your family, so it is simply a service which one you enjoy and for it and you have to pay.
2.- Do you know if you are going to live in that house for more than 3 or 5 years?
The pandemic taught us that mobility is a fundamental key, we saw how many people who lived in big cities with remote work have preferred to move to more remote places.
Where they can have a house with a patio, although in the same way now that the cities are resurfacing again, we see that large companies are once again asking their employees to return to the offices.
You should always take into account that buying a new home has a series of costs that become extremely important, such as the procedures you carry out.
You have to ask them to grant you the credit, the amount you will spend on remodeling or improvements, you will also realize that you need new furniture because the ones you had before do not look good in your new home.
Not to mention what could happen if you had to sell your house in a short time and nothing else in the real estate broker’s commission you will have to pay more than 5%
In the state of Florida, which means that according to Zillow the average price of a home in this state is $356,000, which means that you would have a loss of $17,800 there, not including the other costs that you are going to have.
3.- Should an immigrant who recently arrived in the USA buy a home?
We could think that it is not the best decision, taking into account that there are two factors that will play against the immigrant:
How are you arriving in the country and you still don’t even have a Social Security number?
Which is used by the credit bureaus to know if you are going to be a person of good or bad pay when granting a loan or mortgage for the purchase of a house.
So it would be like taking a black belt exam when you’re just starting out with a white belt.
Bringing as a consequence that the amount you will pay for interest rate is going to be much higher and it is better to wait until your “Credit Score” improves and then if you can ask for a 30 or 15 year mortgage with a fixed rate.
Where you live determines the school your children will attend
It could be that as a family they do not adapt to or do not like a particular school and have to move because of this factor or simply because you changed jobs and with such high gas prices, your transportation costs force you to move.
4.- How do I know technically if it is better for me to rent or buy?
To answer this question, we have to go into a little deeper water and it turns out that there is an extremely interesting index that helps us understand if it is good to rent or buy.
It is about the following relationship: you must divide the price of the house you want to buy by the amount that you would pay in rent for one year, and if the result of this indicator is above 15, the specialists point out that it is better to rent.
If you want to see it as a formula, it would be like this: House price / (monthly rent *12).
At this time, although we have said that the city of Miami has had a huge increase in the amount that people pay for rent.
We can also see that the Price or Rent indicator is above 48, being a value well above 15 and specialists would tell us that it is not a good time to buy, in the world of investments that would be an analysis completely different and much more complex.
5.- How much of my rental income should I spend?
At this point there is a golden rule that states that you should not spend more than 30% of your income on rent, this being the only thing that will allow you to save in the future and invest your money so that it grows over time.
Unfortunately today this is one of the rules that the vast majority tend to miss, representing the amount of rent more than 50% of their income.
In many families, they thus limit their ability to save and expose themselves to unexpected expenses, which end up increasing the balance on your credit card.
6.- But then is it better to rent or buy?
As we can see, the answer will always respond to many personal factors, but to give you more tools to help you make a decision, it is important that you ask yourself the following question:
How strict and planned are you with your expenses?
By this we mean the following:
If you are a person who knows how much you spend month after month and can determine that you have a monthly remainder and that amount, you know that you are not going to succumb to the temptations of consumerism.
And rather you can save it to be invested in an investment portfolio that grows for about 20 years or more, it could be a good option to invest and rather be rented.
Letting that money grow over time for you and when you go to retire you will have the possibility of buying a house or having money available for your retirement.
Now, if you don’t even keep track of how much you spend each month and you know that if you had extra money you would rather spend it today because you don’t know if you’ll grow old…
In that case, having a mortgage debt as a result of the purchase of a home will serve as a straitjacket that makes you have to pay the mortgage every month.
In this way, build a heritage with the value of your house in the future and of course if you have something left over each month, do not stop investing it in a diversified portfolio.
In conclusion, there are many factors that take part in a decision of this type, so that is where a Certified Financial Planner can help you make a decision by modeling the different scenarios with professional tools to determine which one is best for you.