29 May Compare the cost of renting to the cost of buying a home.
A recent Wall Street Journal article concludes that homeownership has not been a particularly good investment. According to article, the rate of return on residential real estate has been much less than the rate of returns on even a safe investment like a treasury bill taking into account rates of return over the past 20 to 30 years. This is a surprise to anyone who has looked at the real estate market as a sure-fire success. But if you own a home, you must take into account the costs of home-ownership which include maintenance, repairs, taxes as well as mortgage expense.
The rate of return on the house should also take into account rent you’d otherwise have to pay to a landlord – something the experts call “imputed rent”.
Of course, when you buy a house, you are using the bank’s money. So you get to “leverage” your investment to some extent. Still, most investment analysts caution about thinking of your home as an “investment.” It is the place where you live. So if your home simply keeps up with inflation, you are doing well.
With the foreclosure crisis cutting so deep into the economy, I always advise clients to make a decision as to whether it is smarter to own or rent. Now, with prices on foreclosed real estate so low, the cost of buying a home is getting to be even less than the cost of renting a home. Normally, these should be more or less the same. So if you can buy for less than you can rent, do it now. You won’t always be able to do so.
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