Is it Better to Rent or to Buy a House During a Recession?
Is it better to purchase or rent a house when the economy is bad? When homes are not selling many people are afraid of buying. The idea of being stuck with a $200,000 house that can only be sold for $100,000 is not appealing for anyone.
On the other side, when someone rents a house, all the money paid disappears completely – no wealth accumulation takes place. Therefore, is it better to rent or buy?
A recession actually means real estate is on sale. When no one is able to sell their property, it is often easier to find great deals. And as Donald Trump states, “It’s not about buying the best property, it’s about getting the best deal.”
The Best Questions to Ask Before Buying a Home
The following questions will help you gain a better understanding in regards to whether you should purchase or rent a house. By looking at your answers to each one of these questions, you will know if it is smart to buy a house during a recession. Sometimes the answer is yes, other times it is no.
How long will I be in the area?
Less than two years: Consider renting. Of course, if you find a good deal, and are interested in A) Fixing a place up and selling it, or B) Renting the house out after you move, buying can still be a great deal.
More than two years: Buying is a good thing to consider. Why pay a large monthly bill to your landlord when that money could be building up an asset for yourself?
Can I Make the Down Payment?
No: Then renting is what you will need to do. But start saving! Building up an asset is smarter than making money for someone else. Consider borrowing money from a relative if possible. One of the greatest gifts a parent could provide a daughter or son is a flexible loan to make a down payment on a house, as the monthly payment of a mortgage should be far less than the monthly rent.
Yes: Consider how much you can save by paying a mortgage as opposed to rent. A house that costs $800/month to rent may only cost $400/month in mortgage payments. Provided you can sell the house for the same amount that you purchased it for, buying can save one a lot of money. CAUTION: Be sure to take into consideration the amount that you will pay on interest AND the costs of any repairs that may need to be done to the property.
If I Rent Out the House for Five Years Will It Be Paid For?
No: An investment is considered good if it pays for itself in five years or less. In other words, if you rent out a house for $1000/month and you paid less than $60,000 ($1,000 X 12 months X 5 Years), it is a great investment. Therefore, if the house costs more than that, do not consider it a good investment. It may still be a great purchase, but do not consider it as a solid investment.
Yes: If the house could pay for itself in five years of being rented out (take into consideration taxes, insurance, repairs, and other costs), then it is certainly a great purchase! Even if you move, and start renting the place out, the rent will more than pay for the mortgage and provide you with a bit of spending cash.
My Experience Buying During the Recession
My brother and I found a house for $10,000 and purchased it. We are both in college and the cost of renting a place for the next couple years would be just as much, if not more, than the price of this house. Of course, there are many things wrong with it – we are learning all of the ins and outs of home repair (along with plenty of help from family members).
We will likely be able to either rent out this house for $600/month or potentially sell it for $35,000 after making some major repairs – providing us with a rent free time in college and the ability to make some residual income for years to come.
When possible and plausible, buying is a far better financial move than renting. Spending money to buy an asset rather than paying to buy an asset for someone else is always a smart move.
During a recession many people are afraid of purchasing homes. However, during a recession is the best time to make purchases because everything is on sale! The key is to make sure that the property has the ability to pay for itself. Now is NOT the time to purchase a $600,000 home that you hope to sell in two years for $800,000. However, now may be the perfect time to buy a $50,000 home that you could rent out for $800/month if you were to move away.
Do you have any tips or suggestions that would benefit people struggling with whether or not to buy a home? Do you have experience purchasing or renting that you believe would benefit others? Please share below.