To buy or to rent and why for a person in my situation?

**maipenrai** · 03-21-2010, 08:52 PM

Hi. I'm new to this forum and to Dave Ramsey's system to find financial freedom.

I hear so many people say that buying a house is a great investment and an asset. But, I'm not completely convinced.

If the key to financial freedom is to have no debt... Why purchase a house that I can not afford to pay cash for?

The house assuming I live in it will not provide cash flow until I sell it years down the road.

Would it be smarter to continue renting and use cash flow from my business to pay the rent? (I'm self employed / small start up company / lead a very modest life)

I like the idea of owning a home but I do not know how it would be considered an asset...? (unless the equity is used to invest in other business opportunities.)

The flip-side to that is that I could invest or save the money I keep by avoiding what would be a more expensive mortgage payment (30yr plan)

Can someone please enlighten me? What would Dave say?

**mateosbaby** · 03-21-2010, 10:59 PM

I don't know what Dave would say in light of these turbulent times, but I have seen/read/heard from several sources (including my real estate agent) that a fresh wave of foreclosures is coming in the very near future. Seriously, rent for now if you can. Another crash will mean even lower prices for houses, and many more on the market yet again.

JMHO

**dcompton** · 03-21-2010, 11:08 PM

I like renting, so bear in mind that I am biased. But if you are content renting, it seems to me that saving or investing the additional money for the present would not be a bad plan. Also, you have to consider that there are a lot of other expenses involved in home ownership besides just the mortgage payment.

**maipenrai** · 03-21-2010, 11:46 PM

Thank you for your replies. Interesting that Baby Step 1 is to buy a house...

I must admit that the idea of being a home owner is intriguing but, as you both said, renting seems to be the smarter choice at the present time.

I guess it's just hard for me to understand since, most people do not actually "own" the house. The bank does...

**dcompton** · 03-21-2010, 11:57 PM

I'm sure you will get a lot more input on this tomorrow, and you may find the vote running in favor of a house. Related questions come up from time to time, and there are always people on both sides. Eventually, you'll hear all the pros and cons, and have a good basis for making a decision.

**Palooka** · 03-22-2010, 12:06 AM

I'm one of those weirdos that liked renting. I've rented houses, apartments, and duplexes. I guess I just didn't feel all that 'stress' over my head.

When I met my dh he already owned this home.... and the money we have put into it...gah!

But it really depends on so much.

**monkeywrangler71** · 03-22-2010, 12:08 AM

Originally Posted by maipenrai

Thank you for your replies. Interesting that Baby Step 1 is to buy a house...

Isn't baby step one a $1000 emergency fund?

I guess it's just hard for me to understand since, most people do not actually "own" the house. The bank does...

The bank only owns part of my house, every two weeks they own less, at some point they will own none.

Your initial question is whether renting or owning is best for your situation, but you don't say anything about what your situation is.

**maipenrai** · 03-22-2010, 12:58 AM

Seems I made a mistake. New Baby step 1.5 is buying a home (listed above in red...)?

Here is my current situation:

I'm 31, single, self employed, have one asset(?) / (business), and a little bad debt.

I own a small start up company that is 1yr old and looks promising. Currently, I lead a VERY modest life...(travel by bus or bicycle, cook at home, rarely shop, and have NO credit cards to speak of)

Bad debt: I owe about 10k USD in college loans and make monthly payments.

Good debt: I owe about 7k in business loans and make monthly payments.

Given the above scenario, do you think it would be wise to buy a home to live in? (I've also considered buying to lease but need to learn a lot more about the process.)

I guess I am hesitant to buy something that does not provide cash flow from the time of purchase...

Thanks in advance!

**ladykemma2** · 03-22-2010, 05:24 AM

don't think about buying a house until completely out of debt, including the student loans and have a 3-6 month emergency fund set up. then you need to save for the down payment.

then above that, consider sinking fund 250-300 a month for maintenance and upkeep.

**Greebo** · 03-22-2010, 05:59 AM

Originally Posted by maipenrai

Thank you for your replies. Interesting that Baby Step 1 is to buy a house...

WHAT??? No - that is not Baby Step 1. Not even 1.5.

OH I see you're reading someone's signature... no that is someone's modified version of the DR plan.

Saving for a home in the DR recommendation happens between BS3 and BS4.

Now - as to your original question:

Why not rent for life? Because *assuming* you will eventually find somewhere you want to live for the rest of your life, renting does mean you pay more for shelter - forever. IF you buy a home on the DR plan, you do so on a 15 year fixed rate mortgage, which means for 15 years your "rent" never goes up (except for taxes and insurance) and then AFTER 15 years, your rent goes away except for taxes and insurance. Going from a 15 year $1,500/month mortgage payment to $200/month sinking fund for taxes and insurance is a huge improvement over paying $1,500 rent a month for life.

But why not buy now? Because a house is a HUGE financial obligation - and if you have loads of consumer debt, car debt, student loan debt, adding a house payment just adds to the chains around your neck. (The borrower is slave to the lender, remember.) A house bought on a shaky financial foundation is not a blessing.

As for paying cash - Dave would prefer it. But he doesn't yell at people for having a mortgage.

And finally - is a house an asset? Neither Dave nor Robert Kiyosaki would say a house is an *asset* in the sense you mentioned. Dave would not because he wants you to pay it off, NOT use it for leverage (that's how so many homes got underwater to begin with - borrow from house, do something, borrow from house, do something - and then the market shrunk). RK would say it's not an asset because it costs money, it doesn't make money.

I agree with both perspectives - a house is NOT an asset in the money making sense - but it *is* an investment in the money saving sense - long term you will have a roof over your head that costs pennies to maintain compared to the high price of rent.

**Greebo** · 03-22-2010, 06:09 AM

Originally Posted by maipenrai

Bad debt: I owe about 10k USD in college loans and make monthly payments.

Good debt: I owe about 7k in business loans and make monthly payments.

Actually that's BAD debt and less bad debt.

No debt is good debt.

The sooner you can get rid of those business loans, the more profitable your business will be.

May I ask what kind of business?

**monkeywrangler71** · 03-22-2010, 09:46 AM

If you are $17k in debt and self-employed in a business that is only a year old, you should not be mortgaging a house. You need to pay off your debt and wait until your business is established and consistently profitable.

Once you are financially stable you need to consider your preferences, skills and future plans. Home ownership can be a financial drain for people who move frequently or can't manage any basic maintenance. Some people simply don't want to look after a house, or to feel tied down to a property. A house can also be an expensive burden to people who travel frequently.

If you decide that home ownership suits you, then you need to assess the real estate market in your area. Check the affordability rating of your city, and compare the cost of renting versus buying, find out if the market in your area is over- or undervalued. Find out what the current trends are, are houses selling quickly or slowly, what is the supply and demand, do sellers or buyers have the upperhand.

All sucessful financial decisions require patience and emotional detatchment.

PS. An asset is something that can be exchanged for cash, not something that generates cash flow.

**Greebo** · 03-22-2010, 09:51 AM

Originally Posted by monkeywrangler71

PS. An asset is something that can be exchanged for cash, not something that generates cash flow.

That is one definition. That is not the definition many business owners use.

The way I look at it - if it costs me money, it's a liability.
If it makes me money, it's an asset.

So for a house, it's costing me money - utilities, taxes, insurance, maintenance, etc. It's only an asset at the time I sell it if I can sell it for more than it cost me in the first place.

For those homeowners underwater, they're painfully learning the fallacy of the idea of "your home is an asset" that they fell for.

**monkeywrangler71** · 03-22-2010, 10:11 AM

Originally Posted by Greebo

That is one definition. That is not the definition many business owners use.

The way I look at it - if it costs me money, it's a liability.
If it makes me money, it's an asset.

So for a house, it's costing me money - utilities, taxes, insurance, maintenance, etc. It's only an asset at the time I sell it if I can sell it for more than it cost me in the first place.

For those homeowners underwater, they're painfully learning the fallacy of the idea of "your home is an asset" that they fell for.

Anything that can be sold is an asset, that is simply what the word means. The fact that some people's liabilities outweigh their assets does not change that.

Your home is an asset, that is not a fallacy. The fallacy that people fell for is that your home is an investment.

**Greebo** · 03-22-2010, 10:18 AM

Originally Posted by monkeywrangler71

Anything that can be sold is an asset, that is simply what the word means. The fact that some people's liabilities outweigh their assets does not change that.

Your home is an asset, that is not a fallacy. The fallacy that people fell for is that your home is an investment.

Like I said - it depends on the definition you use.