Your answer to whether you should buy or rent the home you live in…
Delayed gratification has become a rare virtue these days, but those who can wait benefit greatly from it. One of the biggest financial mistakes people make is to buy a primary residence that is not within their means. And even worse, they justify it by saying it is an investment. I sit with clients every week who have overextended themselves so much on their primary residence that there is no way they can still acquire investment properties. There is a cliché that goes: “Live below your means”. I hate that saying! I’d rather find ways to increase my means and find ways to afford what I want to buy. But living within your means is always going to be necessary and even more so when you are just starting. Usually, one would purchase a primary residence that is three times your annual household income. If, however, you are serious about investing, you should consider purchasing a primary residence that is two years or less of your annual household income.
So, is it wise to own the property you live in? Well, that depends… There are many benefits to owning the property you live in, including:
- You don’t need a rental agent to manage the property for you (unless you need someone to collect money from you to pay you)
- You don’t need to worry about bad tenants who won’t pay or damage your property, and
- Renovations are not in vain and add value to your property. It can also mean higher future rental when you rent out the unit.
I always ask two questions to determine if you should buy or rent the home you live in:
- Can you afford the monthly costs of the property and does it fit into your budget? Remember, this is without justifying it as an investment because this is technically a lifestyle decision.
- Is this a good investment property regardless if you live there? Remember, the correct way to own property is in an entity, such as a trust, and then to rent the property from your trust. In other words, would this property form part of your investment portfolio?
If you can answer yes to both these questions, then it makes sense to own the property you live in. If you answer no to even one, you need to reconsider. There is a new trend emerging with many property investors where they own many investment properties but rent the house they live in since it is not the greatest investment. And I believe a valid question to ask is, “How many properties can I acquire with the cash flow I have available from renting instead of paying much more to buy?”
You can have a home that satisfies your emotional needs or one that will help you increase your means. Which will you choose?