Housing Hurts. Time to Rent?

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.

Wes-Moss-032011-USE-THIS-VERSION

My wife and I recently found out some good friends of ours are returning to Atlanta after spending five years in San Diego. They have a pretty good sense of where they want to live, but with a new job and six-month-old twins, our friends need at least a year to get their bearings before they buy a home and commit to the five-year time horizon I discussed in my blog post Is It Time to Buy a House Again?

The housing data still hasn’t improved since that post. Pending home sales for the month of April were down 11.6 percent, and nationally, home prices have officially entered into double dip territory. The slight rise in prices we saw in early 2010 has been erased, and we’ve touched on fresh lows. In the first quarter of 2011 home prices fell 4.2 percent, and they’re down 5.1 percent compared to April 2010. Prices on average have shrunk back to 2002 levels.

Despite all of this bad news, I still think if you are prepared to buy a home and live there for at least five years, this isn’t a bad time to buy. Of course there are lots of variables to consider when deciding whether you can/should commit to five-plus years in a home. These include:

Children — both current and future. Does this house have enough room for your children? After having two rowdy boys (whose favorite game is run-and-tackle) I can attest to needing a little space. And most importantly, how are the local schools?

Career — Do you see your income rising over the next few years? By how much? Is there a chance you might have to relocate?

Our friends from the West coast won’t know the answer to many of these questions for at least a year. For that reason, renting is the smart thing to do. Here’s why it might make sense for you, too:

  • Flexibility: With the housing market still on shaky ground, you have plenty of time to wait around for your dream home. What’s more, not owning a house frees you to pursue other dreams – a job in another city, starting a business, etc.
  • Expenses: So far this year I have replaced a refrigerator, a dishwasher, a washer-dryer set and an air conditioning unit. These sorts of expenditures never stop, and by renting you remove the worry about many of these unplanned expenses.
  • Home Prices: They aren’t going through the roof anytime soon. Prices are likely close to a bottom, but there won’t be a bungee cord rebound. Rather, when prices do turn around we’ll likely see a slow and steady upward march in home prices similar to the rate of inflation (1 percent to 3 percent per year). Even as prices firm up and start to rise, the “shadow” inventory of homes owned by Americans who would like to sell but never listed their home for sale, will hit the market keeping supply generous, and price increases moderate.

Rental Search Tip – Knock on doors. Well, maybe not literally. But it’s something I’ve done in my neighborhood for the past month as I’ve walked past houses listed as FSBOs – “For Sale By Owner.” In most cases, the owners I spoke to were very open to discussing the possibility of renting to our friends from California. So when you are in the market for a rental home, don’t be afraid to ask about homes that are listed for sale. You just might be able to strike a deal.

– By Wes Moss, for Atlanta Bargain Hunter

Follow Wes Moss: Twitter | Facebook | Email

Atlanta Bargain Hunter: Twitter | Facebook | Email

11 comments Add your comment

allenlewis34

June 6th, 2011
5:10 am

When Your current mortgage has a prepayment penalty you should not refinance your loan, dont make costly mistakes, use tools like “123 Mortgage Refinance” they make it easy to refinance

Alecia

June 6th, 2011
9:07 am

It is really a number dilemma. This week it may make sense to rent. However, when interest rates go out the roof and rents go along with it, the renters will look like fools. Currently rental rates are on the rise and it is cheaper to own than rent. When a house is on the market for 50k and the mortgage on this property(PITI) costs approx $400 a month is it smarter to rent the house 2 doors down for $1100 a month? Granted, you will have to pay $2-3k if the HVAC goes out or 2k for a new roof eventually. However, a difference of $700 a month will cover it. Also, you have built in “rent control”. Eventually this home will be paid for and can be passed down to the next generation.

Tod

June 6th, 2011
12:35 pm

Alecia – The point is also flexibility. One would be “stuck” with that $50k house for quite some time. Additionally, $1100 will rent a house or condo worth substantially more than $50,000. In your scenario, if I could buy a $50,000 property that would generate a consistant $1100 per month, I’d buy it and rent it out!

/

June 6th, 2011
12:43 pm

alecia, when was the last time you replaced a roof or hvac? do you live in the 30’s?

Rabbit

June 6th, 2011
1:24 pm

If you have a stable job, don’t plan on moving for five years (probably more like 7-10 now) have children and have strong need for perceived security – own. If you think you are going to change jobs or be moved and you don’t have at least five years past experience in the location (so you know you really like it), don’t have young children and want to spend at least 700 a month on extra expenses (maintenance, taxes, HOA and casualty loss) – definitely rent

Rabbit

June 6th, 2011
1:26 pm

I meant “don’t want to spend at least 700 a month on expenses.” Sorry for the error

Hare

June 6th, 2011
2:50 pm

I have known some extremely wealthy people who don’t care about owning a home, but instead about making the right investment decision. People get too emotionally tied up in the idea of owning a home. I don’t know if its something American or what, but why wouldn’t you own a home when prices are expected to rise and then sell it when prices may fall or the market gets over inflated? It seems like you would just go from own to rent if you were a smart investor. I understand all of the points about the PIA of moving and dealing with the headaches, but it could be one of the best investment strategies to be able to lever up and take part of some huge cash on cash gains. My realtor has lived in 4 homes in 8 years and that is what has created his wealth….not saving in his 401k!

LoveRenting

June 6th, 2011
3:34 pm

my grandmother left me her house..instead of selling it..we decided to rent it out..best thing I ever did!…instead of getting a lump sum up front the rental income less expenses have paid for 2 children already through college and it being used for child number three…in the next 3 years we will have made as much in rental income as we would have if we sold the house…the renters we have are great and stable. They have 3 small children, no interest in buying and plan on renting for at least another 5 years. In the end I will sell the home and get the same lump sum!

Not so fast my friend

June 6th, 2011
4:04 pm

Love Renting — agree renting out a home you don’t have to sell can be good income potential — but you need some serious tax advice and you need it now. Rental income generating property isn’t treated the same as a second home for tax purposes — when you sell it five years from now you won’t get the “lump sum” — you’ll potentially owe a HUGE pile of income tax, recapture or capital gains tax especially if you’ve been depreciating the house on your tax returns all the while you’re making income….. maybe you’ve planned for it – I hope so.

Regardless, don’t make it sound like it’s free money. Renting a house out has some incredible obligations and risks.

Alecia

June 6th, 2011
11:25 pm

Tod and I- I have been a fulltime landlord for several years and own several homes. So, yes I have replaced HVAC units and roofs recently for 3k or less. Depends if you know how to buy one. Granted, if you have a 3,000 sq ft ranch with architectural shingles, it will cost more. I am considering the house that is 50k, because it is in one of Metro Atl’s best school districts and I know how much the houses rent for in the neighborhood, because I rent the one 2 doors down for $1100/mo. I am enjoying the rental increases and hope that this fear of ownership continues. It’s been great for business.

Not so fast-Capital gains is taxed at a lower rate than income. The maximum rate for cap. gains is 15%. If a property is owned for 1 yr, then it is taxed as capital gains instead of income. If a person wants to rent out their own home, they need to live in it 3 out of the 5 yrs prior to the sale to be exempt of cap. gains up to 500k. Also, usually there is no FICA when you make money in a R.E. transaction. Yes, you do have recaptured depreciation, which will be treated as income. However, depending on a person’s situation the “sting” can be diminished or deferred with a 1035 exchange or depreciation from other rental properties in the same yr. Sometimes folks decide to make the sale in a really lean yr. when they have a lot of deductions. I do agree however, with having a good CPA, everyone should have one.

selling property at Wes

June 13th, 2011
3:56 am

In today’s competitive real estate market, timing is everything.
Many good homes are sold before they are ever advertised. Beat other homebuyers to the hottest new homes for sale with my New Listings Notification.