The biggest question in real estate has long been about whether you should buy or rent.
There are plenty of real estate professionals who will tell you that renting is nothing more than throwing money away that could be used for a down payment, but it’s not that simple.
You now have to be wary of becoming “house poor” as well. I’ll explain what this real estate trap is that you may very well be in danger of falling into, as well as showing you how to avoid it…
The mixture of low interest rates and rising demand in a hot real estate market has been pushing home prices higher and higher. What does that mean for you, the prospective buyer/renter?
For starters, it throws a monkey wrench into the equation that decides the path you should take…
As it is in most financial arenas, knowledge is your greatest weapon when it comes to real estate. And now is the time to arm yourself.
So how should I view the renter/buyer conundrum?
It’s true that in a lot of situations renting should be viewed as wasting money that could otherwise be used towards an investment in a house that will become yours. So renting = money down the drain while buying = an investment.
However, it’s not that simple in all real estate environments all the time.
The bit of wisdom that many people never realize is that you have to look at the purchase of a home as a large, illiquid investment.
And within that sentiment lays the “house poor paralysis” trap…
That is to say that you find a house at the top of your price range and decide to buy with a big down payment and mortgage. In doing so, you lose a great deal of your investment flexibility because it’s all tied up in the home purchase. So while you might very well turn a nice profit on the home in the end, you may lose out on a significantly larger amount of income that you would have received if you rented the home and invested your cash elsewhere, such as stocks.
That’s the downside of the “house poor paralysis” trap, and illustrates why you can’t always blindly follow the blanket advice of professionals…
But avoiding the trap becomes a simple act of doing a bit of homework. Decide on the amount you’re willing to invest in a home that gives you plenty of capital to still invest elsewhere. If your dream home has a higher price tag than that, consider renting (at least for a period of time) before making the move to buy if it’s going to tie up all of your money right now.
