Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, I remained fiscally conservative with my extra income, putting as much into savings as possible, not believing earning an income from primarily blogging would be sustainable in the long run.
Accepting the fact that I had a growing income, I allowed myself to move into a bigger apartment in a nicer neighborhood. That was seven years ago. And around this time these past few years, I’ve repeatedly considered whether it’s time for me to buy a house, leaving the world of renting behind.
The popular belief seems to be renting is throwing money away, but I couldn’t disagree more. Renters’ expenses for living are much lower than those of homeowners. The expenses of living in a house, and maintaining the structure and the land, add up and make this proposition very expensive. A house may increase in value over time, but rarely enough over the long-term to beat inflation, and in order to realize any of those gains, owners must sell and downsize.
I can’t even decide where I want to live, so buying a house that I might end up leaving soon isn’t a good decision. I could find myself in another predicament relatively soon — whether to try to sell a recently-purchased home or try my hand as a landlord, potentially from a distance. This doesn’t seem to be the type of lifestyle I would want, not to mention I haven’t yet had the need to develop some of the skills that would enable me to take care of problems around a house.
There is an urge for me to leave. I would like to have more space, not less. I like my neighbors but I’d probably like them more if we weren’t living so close. The reasons to opt for a house rather than an apartment seem to be related to lifestyle, not to the potential of a financial advantage (which is dubious, anyway). So my next course of option may be renting a single-family house.
But there are ways to make owning a house pay. Forgetting for a moment that I don’t know where in the country — or the world — I want to settle down for an extended period of time, owning a house that provides an income might be a good solution for me. The reality is that I could purchase a two-family house or a house with an apartment with cash, though I may still borrow money if the situation is right. I could rent out the apartment, and the rent would cover the taxes (and potentially part of the mortgage payment if I borrow).
I live in New Jersey, and property taxes are high throughout most of the more desirable portions of the state, and those costs reduce the appeal of owning a single-family house that doesn’t generate an income.
A recent article in the New York Times warns against buying the most expensive house you can afford. Doing so involves taking on much more risk. The loss of an income you rely on can drive someone down the path towards foreclosure. An unexpected job loss can occur at any time, regardless of the national level of unemployment.
Yet, there seems to be some situations that warrant buying if not the biggest house you could absolutely afford, something at the top end of your budget. If you meet these conditions, you may be able to make stretching your budget work from a financial perspective. This is the only way it could be smart to extend your reach rather than buying the least amount of house in which you could see yourself comfortable.
- Even after buying the house, you’ll have assets. You’re not putting all of your wealth into the house.
- You have a clear plan for using your own home to generate income that, if combined with a conservative percentage of other income, covers mortgages, taxes, insurance, and other expenses.
- You get a great deal.
That last point is important. And real estate agents are tricky — they want to close as many deals as possible, so they will often convince a buyer a deal is great when it’s not. I like the way Warren Buffett invests in companies. He has a brand, so an investment from Warren Buffett may be worth more than the same investment from, for example, a hedge fund. So companies will cut Warren Buffett a deal. He doesn’t just go out and buy stock in a company like we smaller investors do.
When Bank of America was on the ropes, the company gave Buffett’s Berkshire Hathaway a $1.5 billion discount on preferred shares. In addition, when Buffett decides to divest, he’ll receive a 5% premium on the value of his investment. These sweetheart deals are key to building wealth through investing at a quicker rate than buying and holding broad market index funds for more than three or more decades.
Getting a great deal doesn’t have to mean buying a fixer-upper. There are a lot of motivated sellers who are willing to negotiate, particularly if you have clout, like Warren Buffett. You won’t have that kind of clout, but having cash seems to go a long way in gaining negotiation strength for the buyer.
This is all good in theory, but in order to apply it to my specific situation, I still have questions I need to answer. I could give myself more time by renewing my lease and paying an extra free for the freedom to “break” it with notice, but that is the same thing I’ve done for the past several years. I’d like to see a change this year. Here are my questions:
- Do I want to stay in New Jersey? New Jersey has a bad reputation, but the area where I live is nice, and there are other fantastic places in New Jersey to live. But it is expensive. House prices are high and taxes are high. I have friends and some family nearby. People who live elsewhere can get much more property for the same amount of money, and my income is the same regardless where I live. My money could go farther where the cost of living is lower.
- If I don’t stay in New Jersey, where would I live? I have family in California — Los Angeles and San Diego — making those locations a choice that makes sense. But California is also expensive. My girlfriend lives in Phoenix and will need to stay there for at least another year, but I haven’t been convinced yet that Phoenix is the best location for me.
- Am I willing to do what it takes to be at least some kind of landlord? My friends who are or have been landlords mostly dislike that particular choice, but I do have other friends who are able to manage properties part-time. I think a house in which I’d live that has an associated apartment might not be too difficult, and I’m in the position to be able to afford help when it comes to maintenance, but what if I decide to move fairly soon?
- Would I be better suited to renting a single-family home? That would give me more flexibility and less responsibility, while possibly expanding my lifestyle a little bit.
There’s a lot for me to consider before I need to give my currently landlord my notice at the end of April. I don’t like the fact that indecision and inertia has kept me in the same place for several years more than I would have originally expected. What do you think you would do in my situation?