Housing is an interesting subject since it was the centerpiece of so many people’s financial lives over the last decade. First, with the boom in housing, then with the bust. I sit firmly in the camp that says housing is an expense, not an investment. Therefore, as little money as possible should be allocated to it.
Run The Numbers
Because we’re viewing housing as an expense, not an investment, we should be diligent in determining what these costs will be on an potential residence. Whether you’re looking at renting or buying, add up all related expenses and make a decision.
Be sure to analyze each of the following:
- Mortgage Interest
- PMI (if borrowing more than 80%)
- Property Taxes
- Insurance
- Home Maintenance
- Lawn Care
- Utilities – How expensive will it be to heat/cool a home of this size? How much water will be required to keep the lawn looking decent?
- Home Owners Association Dues
Now that you’ve got a clear picture of what you can expect to shell out in terms of costs for your home (especially if you’re buying), it’s time to analyze the scenario versus a renting option.
Renting As An Option
Renting got a bad name during the housing boom because people were making so much money by “owning” their homes. Now that the bubble has popped, renting is coming back into focus as a popular option. Like I said above, this is all about the cash outflows for living in a residence. If you can rent for much less, then that’s exactly what you should do.
Yes, there is a tax deduction for mortgage interest, but I would guess that a vast majority of people pay more in additional expenses because they own their home than they make up for with a mortgage interest deduction.
Real estate is local and is always unique to your situation. Therefore, you need to run the numbers yourself and opt for the smartest option financially. By reducing your housing expenses, you can allocate more money towards savings and eventual financial independence.
Jump To Another Step In This Guide:
- Step 1 – Assess Your Situation & Set Some Goals
- Step 2 – Get Out Of Debt
- Step 3 – Smart Money Management
- Step 4 – Boost and Diversify Your Income
- Step 5 – Reduce Housing Expenses
- Step 6 – Make Your Money Work For You
- Step 7 – Protect Against Inflation
- Step 8 – Invest In Cash Flowing Assets
- Step 9 – Pursue Complete Independence
- Step 10 – Make Incremental Improvements
