Buy or Rent?

Advantages of Owning a Home in San Diego

You’ve probably seen lots of financial arguments about why you should own your own home rather than rent. These include being able to budget (no rent increases) and the tax savings you’ll most likely have. Now I’m going to give you some reasons you probably haven’t heard.

Freedom to pursue other goals in life once the major goal of home ownership is achieved


Strange as it sounds, many of my first-time buyers have told me that once they bought the house, other things in their life started to fall into place. It’s as if not owning took so much of their mental energy that other goals were not worked on until that big goal was reached. So buy a home and get on with your life!

A greater sense of belonging to the community


Once you own a home, you feel more attached to the city in which you live. You’re more interested in what happens in town, to the roads, schools, and shopping areas. Some people even become involved in local politics, which you seldom see a renter do.

A commitment to something, a sense of stability


Home ownership is an anchor, something that cannot be pulled out from under you. You’ll never get a notice that you have to move. You’re kids will never have to change schools. It gives you freedom to plan years ahead.

You can change things, a feeling of being in control


It’s your home. You can add to it, remodel it, change the landscaping, do whatever projects you want. You have a feeling of being in control of something in your life. At work we don’t always have control of what happens, but your home is your castle that you have dominion over. You can see what you’re building take shape before your eyes.

More control over the children than in an apartment complex


In a neighborhood, kids usually play in the yards or go to friend’s houses a few doors away. My clients have told me that in an apartment complex they never knew where the kids were. They could be in any of hundreds of apartments, doing who knows what. In a home you get to know the neighbors and watch out for each other’s kids.

Children do better in school and feel more secure


This one surprised me, but buyers have reported to me that their kids calmed down in school after they bought a house. I don’t know why, but it seems to work that way. I remember a single mom watching her son play in the yard, making steps in the slope and building things. She didn’t have to tell him to leave everything alone, like she did at the apartment complex. I guess kids feel the same need for control we adults do.

Time and money saved by not going to the laundromat


A small point, but if you have kids, you know the value of this one. You gain a whole evening a week when you buy a house! The wash gets done in between other things, or while you’re at work. What would you do with the extra evening you’ll have? How about going out for dessert with your spouse with all those quarters?

We’ve been in a home of our own for so long, we take these benefits for granted. We forgot what it’s like to be renters! If you have anything you can add to the list, please let me know via email. I’d love to hear from you!

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Buy a Home in San Diego and Stop Paying Rent Forever

As you know, renting has two big problems – the rent can go up, and you don’t have anything to show for it except a pile of rent receipts. Me, I like knowing that every month I’m $600 richer, no matter what. That doesn’t sound like much, but if you saw 3 $100 bills lying on the ground, you’d sure as heck pick them up, wouldn’t you? Owning a home is like that – Uncle Sam gives you such incredible incentives, they’re just lying there on the ground, and yet some people step right over them, and never scoop them up.

In this article, I will show you in real dollars how you can benefit by owning a home. Maybe no one’s ever explained it to you in detail before, or you didn’t “get it”. Well, if you stick with me though this discussion, I think the light will go on for you.

One of the facts of life is that if you want to have a roof over your head, you have to pay somebody for that roof. In real estate we have a saying, “Whether you rent or whether you buy, you pay for the space you occupy.”

You might be thinking, “I can barely make the rent, how in the world can I afford to buy?” There’s an answer to that, and I’ll get to it later on. But first, let’s start with why it’s to your advantage to own your own home, then we’ll figure out how to make it happen.

Gaining Control

Renting is being out of control – the rent can go up, or the owner can tell you that you have to move. Owning your own home is a rock of stability that can’t be taken from you. It gives you a stake in the community, a sense of belonging. And for most people, it is the majority of their net worth.

Look at it this way – in 30 years, if you rented at $1500 a month, you would have paid out $540,000 and have nothing to show for it. But if you bought a home today for $540,000, at the end of 30 years you would have paid it off and you would own it free and clear.Obviously this example is way too simple, because we all know that rents go up, so you would have paid much more than $540,000. And we can assume that 30 years from now home price will be higher too, so the house would be worth much more than $540,000. house5

Will home prices go even higher?

I know that right now it’s hard to believe that prices will go higher, but consider that 30 years ago people were buying houses here for $40,000. Then consider the Bay Area around San Francisco where small old houses, like the $350,000 Escondido ones, are going for over $1M today. Is it so ridiculous to imagine that this area might become like that in the next 30 years? Most cities in San Diego County have no building room left, or are very close to it.

I mean, imagine you’re on the moon, looking at the earth, looking at the USA from far above. Now imagine everyone in the USA all wanting to live in the little strip of land 10 miles from the Pacific Ocean. Got the picture? I realize not everyone wants to live here, but I want you to understand that a great many people do.

In San Diego, prices are will eventually rise because our population is increasing faster than we are building houses. That’s the bottom line. People are coming from other states, from other countries, and we’re having babies. Unless some disaster causes the number of people to decrease, home prices are expected to climb.

So the question is, what do you do about it? Continue to watch? Or participate and take control of your financial future?

But I Can’t Afford A Home!

Let’s say you’d like to buy a home of your own, but think you can’t afford to do it. I would say just the opposite – that you can’t afford not to do it. Let’s see if I can make it easier for you to swallow.

The government doesn’t want you to pay rent your whole life and end up being dependent on the state, and so Uncle Sam is willing to subsidize your home purchase! Your mortgage interest and real estate taxes are tax-deductible. I’ll explain.

Before you get your paycheck, your employer takes out the taxes, and then you get what’s left to pay your rent, put gas in your car, whatever. But when you buy a house, you take your house payment out of your salary first, and then pay tax on what’s left.

This is such a huge, critical, and important difference that I need to repeat it. As a renter, you’re used to the idea of the government getting their share first and you living on what’s left. As a homeowner, you use your salary to pay for your home first, and then let the government have a share of what’s left. This is how the wealthy think. They think “how much tax do I want to pay?” not “gee, I wonder how much I’ll have left after taxes are taken out.” And owning your own home is a key step in starting to think like the wealthy.

Look At These Numbers!

In practice, it works like this. Let’s say your family income is $100,000 and you pay $2000 in rent. If you buy a home for $500,000 with 20% down, your payment might be $2400 a month. Don’t get upset about the 20% for now, just follow me here for the sake of discussion.

The $2500 comes from a home loan at 3.5%, real estate taxes, homeowner fees, and insurance.

I know $2500 per month is more than $2000, but wait! $1670 of that is a tax deduction, meaning in the first full year of homeownership, you would pay taxes on an income of $79,600 instead of $100,000. Since you are in the 28% tax bracket and 9% state, you would save $7014 a year in taxes, or $584 a month!

(Disclaimer! I’m not a CPA, so I’m not qualified to give tax advice. The numbers I used assume you are already itemizing deductions on Schedule A. Consult your tax professional to see how the numbers work out on your specific tax return.)

So let’s recap. Your rent was $2000, and now your mortgage payment is $2500, but Uncle Sam is giving you $584 of it! So your new cost to have that roof over your head is really $1916, less than you were paying in rent.

piggy But it’s actually better than that, because remember that $600 a month I talked about back at the beginning of this article? That’s the part of the loan that goes towards paying it back, called “principle reduction”. I didn’t figure that into the calculation either, but that’s like putting that money every month right into the bank, the bank of your own home. So now we figure that owning your own home actually saves you $600 a month over renting.

But you say, “getting money back from Uncle Sam is great, but how can I possibly make the $2500 payment with my current take home pay?” Well, you don’t have to, you can take the extra money out of your check now, and let Uncle Sam tax what’s left, remember? You do this by telling your employer to take less taxes out of your check using a W-4 form. This way, you get the extra $500 a month now to make the mortgage payment with, rather than getting a big tax refund at the end of the year!

You can of course, buy with 10% down, 5% down, or even zero down, but in those cases, your monthly housing expense will be much higher than rent, even after figuring the tax savings, so that may or may not be the right way to go, depending on your circumstances.”But I still have a big problem”, you’re thinking, “Where do I get the 20% down, that’s $100,000!” Yes, it is. Now we get to where the rubber meets the road. You have to really want your own home, really believe that this is what you have to do for yourself or for your family. In that case you must make it a priority, and save that money. You’d be surprised how much money is wasted on everyday things, like a $3 Pepsi at a restaurant that costs 16 cents at Costco. If you have money in a $401K, some of that can be used for part of the down payment with no tax penalty.

More Benefits Down The Road

Oh, and there’s more – once the value of your home increases, you can borrow against it and use the money for whatever you want. The money is tax-free, and the interest on this money is tax deductible. So while your renting buddies are paying 10% on their car loans with after tax money, you’re deducting the interest on your car payment because you’re a homeowner.

I know people who have used this method to pay for college for their kids, get the down payment to buy a second home or an investment property, or just borrowing against the house for tax-free retirement income.

And here’s the best one – when you sell that $700,000 house that you paid $500,000 for, you can pocket the gain tax-free, up to $500,000 for a married couple.  The money in your 401K may grow tax-deferred, but when you take out the money to spend in your retirement, you must pay taxes on it.  With your personal residence that you’ve lived in for 2 years, you just put the gains in your pocket and pay no tax.  This is incredible advantage that no other investment can offer!  In fact, there are some interesting ways to retire using these tax-free gains, but that’s another subject.

I challenge you to find me an investment other than real estate that gives you appreciation, leverage, tax deductions and tax-free capital gain.

Until you can do that, I think I’ll keep my money in real estate.

How To Get That First House

So if you’re convinced that you should own a home, how do you actually go about it? What if it’s just too darn expensive in San Diego? Well, there are a number of special first time buyer programs to make it easier, and we’ll definitely explore those together. But what if it’s still too expensive?

In that case, “you gotta do what you gotta do”. You could get a 3 bedroom condo and rent out a couple of the bedrooms to roommates to help pay for it. You could buy a house out of state, rent it out, wait for it to appreciate, then sell it and use that as a down payment here. You could go where real estate is cheaper, like Hemet, to get your first house. Some people who work in San Diego County are going even further than that to get their foot in the door. I know it’s hard, and it wasn’t easy for me to get my first place either. You just have to grit your teeth and do it. The hardships are temporary, but the benefits last a lifetime.

 house4 I remember when my wife and I lived in Orange County in the 1980s and we couldn’t afford a home there. So we actually moved all the way to Atascadero, in San Luis Obispo County, to buy a piece of land and we built a house. After a couple of years, it had increased in value and we were able to sell it and make enough money for a down payment on a home in San Diego. It was tough, but it had to be done.  It all started from getting that first one.

My advice to you is to just go for it. Even if the first house isn’t your dream house, you have to start somewhere. Face your fears and get it done. It’s not just me saying this. In the book, “The Millionaire Next Door”, the author says that more millionaires were made through real estate that any other method. Robert Kiyosaki in his “Rich Dad-Poor Dad” series talks about the “3 mountains” of financial security – your own business, stocks, and real estate.

The next step is up to you. I’d suggest sending me an email or giving me a call and we’ll see what can be done. Even if your lease isn’t up yet, we should still get the ball rolling, because we may have some credit work to do, and that could take 3 months or more. If you’re not ready to talk yet, but would like to be kept up to date with the real estate market, then please call and ask for our free newsletter.

Either way, do something. Get something to show for your efforts. Don’t be like the old saying, “Work your fingers to the bone, and what do you get? Bony fingers.” You know, next year at this time you could still be renting, or you could be in your own home building equity. You might even discover you’re handy at doing home improvements, as some of my clients have done, and they’ve really increased the value of their properties quickly. house3

Who knows what you’ll accomplish once you have this big unfinished business of not owning your home out of the way? You know you need to do it – it’s like a big weight holding you back until you get it done. Today’s a good a day as any. So call or text me at 760-889-2272 and you can stop making your landlord rich and start building a nest egg for yourself instead.