By Joel Barretto, CFPⓇ | via Negosentro.com |
Conventional wisdom dictates that paying for rent is a waste of money. There’s nothing like living in a home you can call your own. To many Filipinos, it’s a sign that you have finally arrived. But before investing all your life savings in a house, there are a few things you must first consider. After all, this is probably the biggest investment you will be making in your life.
As a financial planner, renting vs. buying a house is probably one of the most common questions I get asked. My stock answer is “it depends.” Before you make a decision to buy a house, you will need to carefully evaluate and ponder on the following:
- Liquidity – Are you investing all your cash in the house? Consider that real estate is not liquid. Therefore, will you have enough cash left over in the event of a major emergency?
- Risk – Remember that real estate investing involves risk. This means that there is always the possibility that the amount you bought the property for today, may be less when you sell at the wrong time. A bank foreclosure also means that you may possibly forfeit all the down payment and equity built into your house. If you are dumping all your eggs in this basket, are you prepared for the risk of losing some, if not all your life savings? What is your exit strategy?
- Time Horizon – Like any equity investment, buying real estate means you are investing for the long haul. Are you ready to tie up your money for that long?
- Expenses – Investing in real estate means that you have to be prepared for the expenses associated with owning real estate, i.e. mortgage payments, commissions, major repairs, renovations, taxes, association dues, insurance, etc.. Make sure you have enough cushion for these expenses.
- Mortgage – This is probably the most complicated and confusing part of investing in real estate. Whether or not it makes sense to leverage the purchase of real estate will depend on a lot of factors. Make a wrong move and you can kiss your life savings goodbye. This is a whole article on it’s own, so I won’t go into it here. Just make sure that you understand the terms and conditions of your mortgage contract before signing that dotted line. Things you will need to watch out for are:
- Interest rates
The bottomline is that renting is not necessarily a waste of money. From a WANTS vs. NEEDS perspective, a roof over your head is an essential NEED. The size, amenities and location of the house you are renting, on the other hand, is a WANT, relative to your lifestyle.
Therefore, whether you rent or buy is not as important as what you can afford in terms of the aforementioned considerations. Don’t let your emotions cloud your judgement as you make the most substantial investment of your life. Plan wisely!
Joel Barretto, CFP sold his financial planning practice in Irvine, California U.S.A. to promote financial literacy and awareness in the Philippines. He is a respected Certified Financial Planner practitioner with over 24 years of experience in helping people optimize, manage and protect their wealth.
He is a public speaker and lecturer on a variety of financial planning issues and strategies. With a passion for entrepreneurship, Joel dabbles in venture capital projects and mentors up and coming entrepreneurs on growing their start-up companies. He is a 2nd degree black belt in the martial art of Kempo and enjoys performing and directing stage musicals for community fund raisers. You can reach Joel at email@example.com.