Rent vs. Buy: What You Don't Know

While home price has been rising, rent is inching up nationwide as well. I mentioned in Market Update with Minhua Vol. 20-Strategies for Buyers in the Competitive Market that rent in Los Angeles area is expected to return to the pre-pandemic high later this year. According to California Association of Realtors, CNBC, and HousingWire, rents for single-family homes were up 5.2% across the nation, the largest year-over-year increase in almost 15 years.

In previous blog posts, I discussed benefits of owning your home. Freedom, privacy, and home equity accumulation; just to name a few advantages of owning a home. There're also tax benefits when you can deduct principle/interest payment on mortgage and property tax payment (please consult your accountant or tax preparation professionals for details). Rent is increasing year after year and these benefits of home ownership are profound. So, why prospective home buyers, especially millennials, continue renting instead of buying? A recent survey that questioned 1,071 millennials found that 1 in 4 respondents underestimated how much they can afford by $150,000 or more, when they were asked what they can afford based on their current rent. Many of us might simply think that "I cannot afford buying a home".

Here are simple questions you can ask to figure out if you should buy, what price range you can afford, and if you feel comfortable with the decision.

• Are you in a financial position to buy? You do need to have consistent, stable income. However, you absolutely do not need to have 20% down payment. Even you pay for mortgage insurance initially when your down payment is less than 20%, you can easily refinance and rid mortgage insurance when your home equity rises to 20% of the home value. You need a solid credit score, but it does not need to be in 700s or 800s. It is worth reviewing your credit history with a loan officer; in this way, you can learn if you are ready for a loan process or there are steps you need to take before applying for a home mortgage.

• How much you can afford? And most importantly, what offers better value, buying or renting? You can use the price-to-rent ratio to get a rough idea. Calculate your annual rent payment by multiplying your monthly rent by 12. Divid a purchase price of a similar property by the annual rent. A result less than 20 favors buying. For example, if you rent a 2-bedroom apartment unit for $2,300 in the Great Los Angeles, your annual rent will be $276,000. A 2-bedroom condominium unit in the Great Los Angeles area can be around $450,000. The price-to-rent ratio is less than 2. Buying definitely makes more financial sense.

• Will you keep the property for a few years? This question is for those who are buying homes as their residences. Staying in your home for certain amount of years (2 years out of the 5) allows you not to pay capital gain tax when you sell this home in the future for a higher price. Again for tax-related details, you can consult tax preparation professionals. My previous blog post "Build Wealth Through Home Equity" also explained why you should keep your home for a few years.

• What does home ownership mean to you? Best Picture Oscar winner "Nomadland" taught me that you can make any place your home. It is important to ask yourself what owning a home means to you. Will you enjoy the pride? Or will you feel it is a burden? All you need to do is to follow your heart.