No one wants to compromise when buying a home, but the long-term costs of renting rather than buying are sneaky and usually even more expensive than making a compromise. Sometimes NOT buying something that’s less than perfect might actually make buying that perfect home harder to achieve in the future.
A former colleague had a friend who was renting a fantastic condo by the beach when he was single. This was in the early 2000s (older colleague…), and the rent was cheap: “why buy a house when I can stay here for the same monthly payment as buying, and no down payment?” he thought. Truthfully, the “Dream Home” he really wanted wasn’t affordable (he made decent money but didn’t have the down payment) so he kept renting.
Pretty shortly thereafter he got married. Because his condo was in a better location than her place, his wife moved in with him. The landlord raised the rent, but with her additional income the rent was still affordable and the new couple enjoyed their beach condo life. Again, they probably could have found something to buy, but they were newlyweds living at the beach! So they kept renting.
Well, as happens with many young married couples living together, pretty soon she was pregnant and again they had a decision: keep renting a house that their family was starting to outgrow, or buy a house they could afford and give up the beach life. Since they were now making more money, they could probably have bought a nice little starter house or condo, but again the “Dream House” a 3 bedroom 2 bath near the beach, was still more than they could afford.
That nice starter home would mean giving up the beach life! So, again, they decided that rather than buying, they’d rent a larger condo by the beach. Again, the rent went up, but they couldn’t afford to buy the “Dream Home” so they rented it, meanwhile, that dream was actually getting more expensive and larger as their housing needs changed…
Flash forward 10 years: they’d since had 2 more children with another on the way (4 total!) and the friend approached my former colleague: “I want to buy a house and I need to have at least 4 bedrooms” he said, “and probably will need 5 bedrooms. The rent on something like that, in the area where my kids go to school, is going to bankrupt me. What can I do?”
Our beach-life friend was in a tough situation: by never compromising on the “Dream Home” to buy something he could afford, he’d ended up renting for too long. While he rented, his rent went up, and the prices of homes around him went up as well, pushing his dream further from reality. And to make things worse, his family kept growing so he needed a larger house as time went on. All that rent and he wasn’t building equity with his monthly payments the way he would with a mortgage, so he didn’t have that equity available to buy the “Dream Home” as his housing requirements grew.
As we all know, rent basically goes up over time, but your mortgage payment on a fixed rate mortgage does not. So our beach-life friend was now actually paying MORE in rent than what he would have been paying for a fixed rate mortgage. By the time I heard this story, the down payment needed to get a monthly mortgage payment that he could afford was going to be over $100,000, which was simply too much for him to save while supporting his family.
So, what did he do? Well, I actually never found out: I didn’t get the end of the story from my colleague before he moved on.
What should you do to avoid renting forever?
Make a list of your priorities with your new home, and recognize that you will not be able to get them all when you start shopping: you will probably need to make sacrifices now so that you can get more of what you want when you upgrade later.
Recognize that even though a mortgage payment is almost certainly going to be more money than your rent is each month now, that’s just the “teaser” rental rate because we all know that the rent will be going up over time.