This article was originally published on Forbes.com on January 6, 2021. This article is part 1 of a 4 part series on real estate. Written by Peyton Carr.
When speaking with my clients about financial planning, real estate always comes up early in the conversation. Should I upgrade to a larger house? Should I get more land? Should I leave New York? Is San Francisco too expensive?
This four-part series answers the questions you may have, addresses common myths and concerns, provides critical insights about challenges and opportunities in real estate, and uncomplicates the process. I’ll walk you through a framework to think about how to evaluate a home purchase from a financial planning perspective, the nuts and bolts of the homebuying process, and ways to leverage real estate as an asset.
The company founders I advise are often coming into significant wealth, sometimes for the first time in their life. Suddenly, they can afford a house or condo — a big one, maybe even the home of their dreams. Past generations would’ve jumped all over this opportunity in a heartbeat. Dumping your first hard-earned windfall into your first home was just something previous generations did, without questioning it.
But is buying real estate still a smart move to make? And where should I buy if so?
The answer depends on a number of factors and is something you should not take lightly.
Rent vs. Buy
The decision to rent or buy is one that’s rife with both emotional and practical considerations. On the one hand, most of us have been raised to believe that owning a home of your own is a measure of financial success. It comes part and parcel with achieving the American Dream. So even the most independent thinkers among us are susceptible to the traditional pull of ownership.
On the other hand, the analytical thinking that got you this far in your career knows better than to give in to the conventional wisdom of property ownership. You know that alternatives exist for building wealth. Maybe you’ve noticed some of your peers forgo the real estate route and wonder if there might be something to this trend. Are they simply taking a cavalier YOLO approach, bucking the traditional path of ownership in fear of settling down? Or do they know something you don’t about the risks of getting into real estate?
Perhaps it’s a little of each. If your career is stable and family size won’t change much, buying in a particular locale can be a better choice than renting. However, tying yourself to one place by buying into a particular market can be a hindrance if you want to retain the option to easily move for a different opportunity or if you may need a larger home for a bigger family in the coming years. What if you can’t sell the property or you’re in a down market and lose money on the property? This would be the risk you take.
When you rent, you’re free to go where you please — worst-case scenario, you’re out of pocket for a few month’s rent to break your lease. If your family grows, you can move down the hallway for an extra bedroom. If the neighborhood loses its appeal, you can move across town next year without taking a big hit. Plus, you don’t have to worry about maintenance or upkeep.
Maybe you consider yourself a maverick or disruptor, and that part of your personality is urging you to buck tradition and avoid any anchors at all costs. I say honor who you are, but not at the cost of waking up five to ten years from now having burned through $500k-$1mn on rent that could’ve been directed at building your equity in a home, all because you bought into the idea that homeownership is old school. Buying real estate might not be the right choice for you right now, but go into the decision with the right data and facts.
Ownership comes with other costs and risks that I will address in the next article in this four-part series, but renting also comes with its fair share of drawbacks. Most significantly, rent tends always to increase, and it can increase dramatically in hot markets, whereas mortgage payments can be fixed. And to a certain extent, the old adage is true — when you rent, you’re making your landlord rich — at least relatively speaking. Instead of depositing funds into an asset, you are giving money away that you will never see again.
Use an online ‘rent versus buy’ calculator to help determine where you get the most value depending on your situation.
Deciding whether to rent or buy is not an easy decision; you can lose or gain either way. Before moving forward, think through your 5-10 year plan and do your due diligence.
The next article in this series will dive into the dynamics of the real estate market, break down the costs, benefits, and risks associated with homeownership in the context of your overall financial plan, explore the ins and outs of real estate financing, and clarify how to incisively navigate the process of buying and holding property.
The Bottom Line
Real estate can be an asset or a liability; it comes with considerable pros and cons as well as tremendous costs and benefits.
As a founder, your ultimate goal considering a real estate purchase is to make a well-informed decision based on quantitative data while factoring in qualitative measures. Knowing what you have to gain or lose makes all the difference, and doing your due diligence will ensure you are making a sound decision.
This article is Part 1 of the Guide to Real Estate series. Read Part 2.
