real estate
Still, each investment is different, and when it comes to real estate, there is a wide range of factors you need to consider before making a well-informed decision.
Regardless of how you see it, housing is a major decision in one’s life. It’s also a significant financial expense that influences your lifestyle and quality of life for the foreseeable future.
Let’s face it – most people don’t have the knowledge or the comprehensive framework to evaluate the rent vs buy decision.
So how do you make sure you make the right decision? As a regular person, there are a couple of steps you can take to minimize the risk
#1: Hire a Professional (or several)
You will likely benefit from the help of a real estate agent, financial advisor, and maybe even a tax specialist. These are highly-trained professionals who understand the renting versus buying dilemma and can offer valuable insight into the process.
#2: Understand the Math
If we oversimplify the equation, we end up with three main cost categories for homeowners: – Cost of capital (broken into the cost of debt and the cost of equity) – Maintenance (covers a wide range of expenses) – Property tax (a tax you pay to own the home in a specific area)
1. Property taxes should not amount to more than 1% of the value of the home. 2. Maintenance costs should also be around 1% of the value of the property. 3. The cost of capital should be around 3% of the value of the house.
As useful at it may be, the 5% rule needs to be applied with caution and the results are more like guidelines. Still, it sets the right framework and allows you to consider all the costs. Plus, it’s a clear indicator of an overpriced housing market.