There are two ways to take control of the real estate in tulum mexico. One option is to retain permanent control, i.e. The other is to take full ownership. This offers capital appreciation and eliminates the need to continue paying rent. The other option is to pay rent but still be able to use the property as they need. From a personal finance perspective, which decision makes the most sense? What is included in rent vs. Buy? This article will describe the rent vs. purchase decision.
Compare Annual Expenses
The average person tends to view home-buying as an emotional decision. You can also find the traditional wisdom, which says that buying is always more beneficial than renting. But, this is not the case for sophisticated real property investors or anyone concerned with how their money has been spent.
Instead, consider whether it’s more profitable to rent or buy a house. Comparing the annual expenses is key. Pay particular attention to the phrase “expenses”. We are not comparing cashflows. Instead, we compare expenses.
The mortgage we pay when we buy a house is also due. There are two parts to the mortgage. One of these components is the principal and one is interested. The interest component can be considered an expense. This is simply the interest that is taking money out of your pocket today, but that you will not see in the future. We will therefore use this amount in our calculation. The principal component of the mortgage repayment is your savings. This is the equivalent of taking money out one way and putting it back in another. Because this money is savings we won’t add it to our calculations.
Thus, our house loan expenses will include interest after deducting tax shield, property taxes, insurance, maintenance, and other costs. This would represent the amount of money spent during the period.
However, rent expenses are quite straightforward. There might be an initial cost to pay a landlord’s deposit. It is not an expenditure, but a loan without interest. The money will be returned when one vacates the house. The monthly rental must also be paid. A down payment is a cost that needs to be paid to purchase a home. This means that even if you did nothing to buy a home, you could still earn interest from the money you saved for down payments. This must be reduced by your monthly rent.
It is, therefore, possible to make a simple decision about renting versus buying a house.
Future Annual Expenses
It’s important to remember that neither buying nor renting are decisions that can be made overnight. These decisions require commitment and should be done over several years. Although comparing annual figures is an appropriate thing to do, it is not wise to compare data for the current calendar year. Instead, one should consider the cash flow and expense projections for several years.
This is where rent or buy becomes a complicated decision. This is because the decision is highly sensitive to the capital appreciation that will be assumed in the future. A change in capital appreciation by just one percentage point could result in a large increase in net present value (e.g. $50,000). Forecasting future real property prices is also difficult. One must be cautious about what future assumptions are being made into the model. These can potentially turn the decision around.
The individual’s risk appetite is another factor that influences the decision to rent or buy. Some people will not be afraid of the risks that a mortgage can bring. Mortgages increase risk due to the interest that must be paid, and the investor’s vulnerability to price fluctuations in the market. The mortgage is essentially a leveraged bet, so a mortgage can make a significant impact on an individual’s net worth.
More risk-averse people prefer renting. Rents don’t fluctuate nearly so much as property values. Even though rents can change significantly in a neighborhood, the renter has the option to move to another area or even another city if needed.
Stability or Flexibility?
The act of buying real estate is similar to putting an anchor in a certain place. Our lives become stable. People decorate their homes based on their tastes. It is also common to move from one house to another. A home purchase eliminates this need and gives stability.
Renting on the other side allows one to test out different neighborhoods and apartment sizes to find what works best for them. Renting is better for those who move regularly because of their jobs.
The buy vs. Rent analysis is partially financial. Because of future assumptions, it can be hard to determine the financial aspect of the analysis. However, one should also understand their level of risk and desired flexibility before taking such a drastic decision.