Should you own or rent where you live? It is a question that many people ask and there are dozens of opinions on why one option is better than others. In areas like Seattle, the cost of buying a home may seem nearly impossible to meet. Yet, renting isn’t much more affordable.
Even in areas where home prices are high, it still usually makes sense to own instead of rent your home. However, for this to be a financially sound decision, you need to apply the right strategy to the process of homeownership. Every Sagareus Real Estate Advisor is trained to help clients develop a long term real estate ownership strategy.
Whether you should Rent or Buy where you live is up for debate. What is not up for debate is the fact that you absolutely should own real estate. I assume you agree with this statement, otherwise, why are you reading this article?? So the question is not Should I? The question is How can I? More specifically, how can I set myself up financial through real estate ownership? I'm glad you asked.
To purchase real estate without living in it (referred to as Non-Owner Occupied), requires 20-25% down payment; In Greater Seattle, we're looking at $150k-$200k down payment to get into a real estate. Most people do not have these funds available, and so, Owner Occupant loans come into play.
Owner Occupant Loans require less down payment (3.5-20%), are easier to qualify for, and allows you to add value to the property overtime.
Before we get into the specific Owner Occupant Strategies, let's review 2 important terms:
The easiest way to understand the difference is simple: An asset puts money in your pocket. A liability takes money out of your pocket. Anything you own that pays you money every day, month, or year is an asset. Anything that costs you money every day, month or year is a personal liability.
To become wealthier, buy assets and reduce liabilities. Once your assets pay for all your liabilities, you are financially free!
No matter where you live, the monthly amount you pay is a liability, because it costs money every month. It's an important mind shift to consider that your primary residence is a financial liability, because it does not produce income. Whether you're renting or buying, housing cost remains a liability.
The difference is one option gives you the control and opportunity to convert the liability to an asset. The long term strategy for your home purchase is to convert it into an income producing asset. The immediate goal is to trade one liability for a better one. In other words:
Trade your rent payment liability for a mortgage payment liability.
That being said, if possible you do not want to increase your housing cost liability when you buy. Instead, we aim to match the liability of your rent payment in the same amount for a mortgage payment.
For example, let’s say you are currently renting a home for $2,500 a month. You are thinking about buying a home. You’ll want to trade in that rental liability with a mortgage payment that is about the same - $2,500 a month. To do this, you need to secure a loan that allows you to get the right fixed rate and terms to achieve that $2,500 a month payment.
Everyone has a different approach based on their goals, needs, and current circumstances.
The key component any of these 3 options is your intention going into the purchase.
What is the plan for the property? How will you ensure this property goes up in value, not down? Will you convert this liability to an asset, if so when & how?
There are 3 basic strategies to leverage your primary residence to jump start your real estate portfolio:
1- Stepping Stone - Buying a starter home, building equity and increasing value (utilizing the equity growth trifecta), then selling this home and using the proceeds to step up into a larger home.
2- BRRRR Ownership - BRRRR Ownership is short for Buy, Reside, Relocate, Rent, Repeat. In other words, buy a home with the intention of keeping it for a rental long term. You could Reside in the property for as little as 1 year, but could stay as long as you wanted or needed to in order to save up for your next purchase. (BRRRR Ownership refers specifically to living in the property, not to be confused with BRRRR Investing, which is similar, except you never live in the property itself).
3- House Hack - House hacking is when you create an income stream from the property you are living in. The most aggressive house hack is purchasing in a 4plex, living in 1 unit and renting the other 3. Other options include: renting one or more roommates, purchasing a 2 or 3 unit property, living in 1 unit and renting the other units traditionally or on AirBnB.
Once you decide what you're trying to accomplish with your real estate ownership, we can start developing your specific strategy based on other factors (such as current finances, lifestyle needs, etc). So what do you want? Some goals my clients have had in the past include:
For me personally, I simply didn't want to be worried about money all the time. I like being able to do what I want, with who I want, whenever I want. There is only 1 way to achieve this freedom: Ownership.