All these financial and real estate guru’s say, “Your home is the biggest investment you’ll ever make.” But 99% of the timing of people’s buying and selling their “biggest investment” is based on when it’s convenient for them based on their personal situation. “I just got married, I should buy a home now.” “I just got a job somewhere else, I should sell this home and buy a new home now.” “I am about to have another kid and need more space, I will buy a home now.”
This can be financially devastating in today’s volatile housing world where pricing can take wild swings and tumbles and doesn’t just consistently slowly appreciate like we’d all prefer. In many US markets if you bought a $300,000 home in 2007 because you just got married, then you had to move in 2009 for a new job, that home could have been worth $200,000 and bankrupted you to leave or cost you a dream job to stay stuck in it.
I’ve decided that market timing should be taken into consideration and not just personal life convenience when buying or selling homes from now on, and I encourage you to do the same. No shame in renting and waiting to buy if the market is overheated and heavily favors sellers. No shame in selling in that situation either even if it’s not maximum convenient timing for your personal life. Selling that house at $300,000 for a profit in 2007 even if you didn’t have a pressing need to would have been pretty smart. Would you put up with a little personal inconvenience and a couple weekends of hard work moving if someone paid you $100,000? Of course your would! Would you “throw away” $30,000 renting for a couple years if someone paid you $100,000 to do so? You bet you would! But yet I see people all the time choosing not to sell when it’s an obvious seller’s market or rushing to buy an obviously overpriced house in the same situation because they think it’s ALWAYS smarter to buy than rent.
If you think your home is your biggest investment, TREAT IT LIKE ONE. You’d never invest 6-figures in a stock or mutual fund based on when you are having a baby; no you’d try to predict where its value is going based on market factors, not personal-life factors.
I hope these words will help one of you that’s pondering a “should I buy” or “should I sell” decision.
For me to buy a primary residence for my family, I need 4 things, ALL FOUR of them must be true. 3 for 4 is unacceptable.
1) I have at least a 15-20% down payment. This way I could be able to sell it in an emergency if I really needed to and never be stuck in it. Remember real estate can go up or down 10% in a year or two in many markets easily, and selling is going to cost you 6% in fees… so 15% is a bare minimum to make sure you never get imprisoned in a house against your will. Things can happen, life will change, and you always want enough equity to be able to raise anchor when you need to.
2) I don’t have to take out an absurdly high interest rate loan for the remainder. I’m sorry but no “investment” is a good investment if you have to pay 8, 9, 10, 11 % annual interest on it. If I can’t get a fixed rate mortgage between 2-6%… I’m not buying, or I’ll buy cash once I’ve saved enough for a 100% down payment.
3) I am 90+% confident I will be living in that location for at least 5 years and my family will be happy living in that house for 5+ years. This is a big deal for me because I’m an entrepreneur and rarely do something for more than 5 years… this means renting is probably best for me. Why 5 years? Because if you sell within 5 years of buying, you’re almost guaranteed to lose money. Remember selling costs you 6%, and almost ALL your mortgage payment the first 5 years is going to interest not equity, so you accrue almost no equity during those 5 years and will take a 6% hit when you sell… that means you only break even if the value of the home has risen 6%. If it’s stayed the same… you lose money. If it’s lost value… you lose a LOT of money. Better to rent for 1-5 years and guarantee you don’t take a big loss if you’re not sure you’re going to live there long term.
4) The market timing isn’t ridiculous favoring sellers, as in not at multi-year high prices when jobs/wages haven’t increased in the area nearly enough to justify the skyrocketing appraisals. Ask yourself, “Over the last few years, have home prices hear risen way faster than the actual economy has?” If so, wait and rent. However, if the economy, jobs and pay in the area is increasing steadily and homes haven’t gone up much yet, it could be a great time to buy. This fourth point is the one most people neglect. They buy their home emotionally based on when they WANT to. Hopefully you’ll want a home when it’s a good time to buy a home, but a disciplined investor knows not to buy when the market is signaling it’s stupid to. Listen to the market. Rent and be patient if it’s a stupid time to buy, keep saving money, then buy like crazy when it finally is a great time to buy, and you’ll come out WAY AHEAD.
If I’m not 4 for 4 on all of these things… I’m NOT BUYING. I’ve learned this lesson already and will not repeat past mistakes. The traditional advice of, “It’s always smarter to buy than rent.” is a BIG FAT LIE. LIE LIE LIE.
All the info above pertains to primary residence buying. Buying an investment property is a little bit easier decision… all I need to know is:
1) Will I be able to get a good renter here? How much will I get in rent, and how much positive cash flow will that generate?
2) Is it a good time to buy in this market where I think the future price will be higher than today’s?
If you can get good cash flow and feel like you’re getting a good purchase price that will go up, you may have a winning rental property.
So for me, until I’m ready to commit long-term to living somewhere… I’ll probably choose to rent and buy rental properties not personal properties. When I’m 4 for 4 on the primary residence factors above, I’ll buy a family home as well.