Rent vs. Buy Analysis
Apr 3, 2013, 6:29 PM | Updated: 7:21 pm
QUESTION: April in New York is trying to convince her sister to buy a house. Her sister is hesitant because people at work are telling her not to because she won’t have anyone to help her with the house. Dave advises April to have her sister contact a real estate agent about a rent versus buy analysis.
ANSWER: If she is only going to stay there for five or seven years, then I agree with you. There are a couple of things that come to mind that you could do. One is that you might get in touch with an Endorsed Local Provider in her area who does real estate. Most quality real estate agents like that can show someone what is called a buy versus rent analysis. It’s a pretty sophisticated analysis.
You say that rents in an area have, over the last 20 years, gone up X% per year. You are paying a certain amount right now and, if the rents go up the amount that they normally go up over the next five years, you’ll be paying that new amount. Based on that, you will have a cost of housing of a certain amount.
If you compare that to buying and owning versus how much the house goes up in value and the fact that your payments are now fixed, then you start to see the financial, mathematical benefit of owning. That’s a good analysis to show someone.
The second thing that comes to mind is that she doesn’t need to listen to broke people at her work for financial advice. You don’t ask people who have been divorced 10 times how to be married. These people are sweet and they mean well, but they’re stupid. I’m not going to do what they say with money, because they don’t have any money.
If it’s a bunch of rich people saying to not buy a house, I need to stop and think about what they are saying. And that’s not happening, by the way, because a lot of wealthy people made their money by having a big chunk of their first push of wealth in home ownership.
What I would have her do is pay off all of her debts, cut up her credit card, save up an emergency fund and a down payment, then look at buying. She doesn’t need to buy until she gets these things cleaned up.
To do a proper analysis, she can do a rent versus buy analysis with a quality real estate agent, and it’s pretty amazing to see those things.
