So one of the most often asked question we get here when people are looking to move to Dallas Texas is, “Should we Buy or Rent first?”. As many have seen the power of owning real estate in the current market and the double digit annual appreciation rates, there are times when it is better to rent than to buy.

Ten years ago, we made the move to Dallas Texas from Phoenix Arizona and we did rent first. There were some circumstances that we need to play out first before we made that commitment to buy. As you will see form the advise below, one of the questions you need to ask yourself is how long do you plan on staying in the home. Of course, things can change quick, however you need to make some assumptions in order to know. So lets discuss when it may or may not be a good time to rent, or should you buy.

What’s Your Financial Position?

Many factors can play into buying a home that makes it profitable, or whether you come out upside down on the deal. Interest rates are a big one, current market conditions and how disciplined of investor are you also play a significant role.

One of those factors is the interest rate, it can make a huge difference depending on if you have good credit or not. As those interest rate percentages increase, it does affect your out-of-pocket each month, and if it’s really bad say under 500 you may not be able to qualify at all until you work on repairing it.

How about your saving and the amount for the Down Payment? typically you should for 20% down in order to avoid mortgage insurance, which if you have to pay for with an increase you pay each month. There are FHA and other programs you may be able to avoid the PMI on, however you tend to pay higher interest rates with those as well.

What’s your income situation? Do you have a steady paycheck, are you self-employed, or do you rely on bonuses that can fluctuate and may not be counted?

How about your Debts?

If you deep in debt, would you even be able to afford buying a home? Lenders will look at your current debt to see what the ratio may be, ideally you should not exceed 36% of your pre-tax income. If you do exceed that, you may need to put together a plan of paying some credit cards or other debts off before you meet the lending criteria for debt to income ratio.

How Long are You Looking to Stay?

Having an idea of how long you want to stay in the area will be a huge factor in your decision to buy or rent. One reason is that closing costs associated with a loan are better if they are prorated over years to decide if that front loaded cost makes sense. Fees like closing costs, loan points, mortgage broker fees, title insurance, appraisal and others I am not naming may not make sense if your only in the home for a year or two.

Below I show some quick calculations of how cost of ownership may not warrant the costs for a short term purchase. I show below a couple of quick analysis tools that people you to indicate whether buying or renting may be better.

I used the 5% RULE and the more basic Price to Rent Ratio to get some quick indications, as noted they contradict each other. You can google both of them in order to understand the computations to come to the result.

The assumptions used are as follows:

• Purchase Price $500,000

• Average Real Estate Appreciate rate in Texas is about 5% (not like what its been for past few years, things will go correct)

• Market rent for a comparable home is about $3000 a month.

• Current Interest rate on Conventional loan is about 5.25%.

The 5% rule indicates its better to rent and invest the down payment and amount you would save monthly on the mortgage payment in the stock market that has averaged about 7%, until market and interest rates are more favorable. The catch with this is you would need to be disciplined enough to actually invest the money and not blow it on something else. Otherwise you would be better off buying and staying for sometime as home ownership is in a sense a forced saving plan, as indication if you don’t pay the mortgage payment, you may have a sheriff show up and escort off the property.

The simpler Price to Rent Ratio indicates its still better to purchase since the value is under 17.

One other issue you always need to worry about as a tenent is, landlords will always look to maximize their investment, and that does not make them evil. They saved, bought the home and rented it, thus they enjoyed the fruits of ownership. So every chance they have to raise rents, they are going to take it. As things may deteriorate in the economy (Jobs market, interest rates, inflation, etc) it makes it harder on people to qualify for the purchase of a home, and that means you are competing against more people for that rental. Supply is down and Demand is up in this scenario, which means your rent is going up, or you need to move out.

If you take a different look at this, you can see quickly that if you only stayed 2 years and the interest rate, housing appreciation stay as assumed above. You will take a loss on the home once you go to sell in terms of the cost of home ownership. These are just estimates, and assumptions to what your net proceeds would be at the end of the 2yrs and what you paid to own the home.

Would you want the house if it did not go up in value for some time?

As you may, or if you are younger, may not remember, homes do not always go up in value. In 2008, the great housing bubble burst and home values dropped 50% in some areas. Though home values did recover within a few years, if you were not planning on staying for some time that could really put you in a bad situation to have to wait 3 -5 years just to break even on the deal. Or worse, be forced to short sell or foreclose as that will set you back years on buying a new home.

Be HONEST with yourself!

I know its cheesy, but what does your gut say about it? At the end of the day, its you and your family on the hook for one of the biggest financial decisions you may make in your life. So be honest with yourself and loved ones.

Are you willing to take on the commitments that owning a home entails?

• Making repairs and keeping up with maintenance.

• Paying HOA fees.

• Home owners insurance

• Property taxes (HUGE almost 2% in Texas), but really you will just pay someone else’s if you rent.

The list continues on the costs of home ownership. However, to be honest, you will just be paying someone else’s and they just call it rent.

So hopefully this has helped you a bit, I myself have seen the huge blessing and stability owning my own home has brought me and my family.

• Almost 100% appreciation since we bought.

• Never having a landlord change my payment

• Never being told to move because they want to sell the home.

But we have had challenges as well, A/C breaks, water heater blows up, leaky roofs, plumbing issues, fence falling over and so on.

In the end, buying has been the winner for us, however if we were in a different situation, it may not have been.