Full Disclosure Finance

By Justin

Here is the continuation of my quest to produce a systematic tool for identifying if you should buy or rent.

The previous post discussed the Level of Financial Education as a key indicator. Below is a complete list of the key variables.

Key Variables affecting the Rent vs. Buy decision:
• Level of Financial Education
• Plan for Savings
• % Down Payment
• Property Market
• Stock Market
• Nature of Income
• Location

2. Plan for Savings
Following up on my previous post, the next factor in the Rent vs Buy decision concerns your plan for savings. A large portion of savings is generally used to purchase a personal residence, tieing up a large amount of capital in the process.

Ask yourself what you would use the down payment money for if it didn’t go toward a house? If your answer would be to buy a car or some other consumable, buying a house is likely right for you because it would force you to put the money “away”.

However, if you can see yourself using the capital to purchase an investment property, start a business, or invest it in a great company, then you should at least consider renting. Definitely perform a detailed cost analysis with cash flows and equity projections to compare the 2 scenarios.

As for scoring, if you would spend your savings on shopping, travel, cars, etc. before investing it, give yourself a 1. If you would leverage it in real estate or through another investment, give yourself a 5. If you would plan on dumping it into a mutual fund give yourself a 3.

3. % Down Payment
My post regarding COCR / ROI variation with down payment amounts highlighted that lower down payment amounts are better for investment cash flow but worse for equity or a quick sale. These rules will be different for a primary residence and require more description.

Down payment amounts affect the rent versus buy decision because a low down payment will increase the mortgage owed. By putting down less than 20%, one would either be able to afford a larger property by using all of their savings or find one in their budget but use a small portion of their savings. Either way your expenses will be higher than putting down 20% or more to reduce your mortgage amount.

Complete a cash flow analysis because the higher mortgage payment might make renting substantially better. Then calculate the money you would save by renting and compare it to how much you would gain in “appreciation” if you owned. This number should give you an indication of the true winner in the debate.

Score yourself from 1-5 once again. A score of 1 would mean you intend to put down as little money as possible to get into a house (5%). Score yourself a 5 if you plan on putting down 20% or more.

Stay tuned for the next post outlining the Property and Stock Markets and their influence on the Rent vs, Buy decision.