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Konstantin Bespalov
Konstantin Bespalov

Rent Before Buying

When it comes to maximizing your lifestyle and net worth, the question "should I rent or buy" is one of the most heavily debated. Even if you already own your home or apartment, it's a good exercise to regularly consider whether living there is the optimal move.

rent before buying

Before the pandemic, they bought a second, smaller home in a less central location that cost 40% less than what they paid for the first house. Their new house had a mortgage of $3,000 and could have rented out for $4,500 a month.

To them, a smaller house with a rental value of $4,500 was more aligned with their budget and household size. So they rented out their old house for $7,500 a month and boosted their monthly cash flow by at least $3,000.

If you've owned for a while, it never hurts to do some research and see how much rent your home could command in the current market. You might be surprised. As of June 2022, the national median rent price has increased by 14.1%, according to data from Apartment List.

Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn't pay more than $750,000 because the monthly market rent was $7,500.

Spending $7,500 per month ($90,000 a year) on rent may sound expensive, but paying $7,500 a month in rent is actually relatively good value, since you'd have needed to spend roughly 360 times the monthly rent to buy that house at its market price of about $2.7 million at the time.

It may be harder to follow the BURL real estate investing rule in expensive cities like New York, Los Angeles and San Francisco. There are people who pay six-figures a year in rent, but are actually coming out ahead thanks to the BURL rule. These renters are investing in different properties in other parts of the country for higher rental yields.

In the Midwest, there are properties for around $200,000 that could rent for $2,000 a month based on the 100 times monthly rent rule. Amazing value for investors but not so much for renters, even if the absolute dollar amount for rent is low.

Even if the owner could only charge $1,200 (versus an expected $2,000) a month in rent, bringing the $200,000 property purchase equal to 167 times the monthly rent, owning is still a better value proposition, especially if the property continues to appreciate.

If the area in which you live, or would like to live, has market prices that look like this, you should buy rather than rent, since you could get cash-flow positive immediately if you were to one day rent the property out.

Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, his personal finance website. He has been featured in major publications including The Wall Street Journal, The Sydney Herald, The Chicago Tribune and The L.A. Times. Sam's new book "Buy This, Not That: How to Spend Your Way to Wealth and Financial Freedom" is out now.

A rent-to-own home is one that allows for a tenant to lease the property, along with the option to buy it before the lease expires. Through rent-to-own, tenants can effectively test-drive a home, living in it for a period of time before they choose whether to buy it. This can be a great way to find out if you like the neighborhood as well as the residence itslef. The owner of the home, meanwhile, can use the purchase option to lock in a sale price, while also enjoying income from a high-quality tenant.

State laws vary on rent-to-own contracts, but typically, the deals can be set up any way the buyer/tenant and seller/landlord prefer. Both parties must agree on the purchase price, which can be tricky when the sale is happening several years in the future. In a rising market, for example, the seller might want the buyer to pay more than the current value of the property.

Then, each month, the buyer/tenant makes a payment. A designated percentage of it is called the rent credit. The homeowner/landlord will put your rent credit into an escrow account to be applied to your down payment later.

Most importantly, you should work on improving your credit score and building a solid credit history. If you have existing debt, try to pay it down aggressively before you apply for a mortgage. These measures help you get approved for a loan and may allow you to get better terms, such as a lower interest rate.

The lease will spell out what (if any) portion of the lease option or rent payment will go toward the purchase price. Remember, you can (and should) negotiate the option amount and monthly rent payments ahead of time. In most cases, your option fee goes toward reducing the purchase price of the property.

A lease-purchase agreement is very similar to a lease-option agreement. You still put a certain percentage of your rent payments toward a down payment to buy the home. One difference with this type of agreement is that you and the seller agree to a purchase price ahead of time. You can both agree to a price before you sign a lease agreement, or specify a date for a home appraisal and decide on a price after the appraisal is completed.

Rent-to-own opportunities are not as common as traditional rentals or sales, but they are out there. Your best bet is to use a rent-to-own company to find properties with owners looking specifically for tenant-buyers. Here are a few reputable options:

Like Home Partners, Divvy helps you look for a home. If you qualify for the program, they purchase the home you choose and set aside a portion of your rent to put toward your eventual purchase. Divvy aims to help you qualify for a mortgage within three years.

Typically, when your rent-to-own lease ends, you will either have the option of buying the house or be contractually required to buy the house. Either way, make sure you start working to secure a mortgage well in advance.

Possibly the least satisfying answer to this question, but still a viable one, is patience. Spend a year or two saving as much money as you can, and you might find yourself able to qualify for a mortgage and afford buying a home more easily.

As you consider a move to Hawaii, deciding between buying a home and renting for a while first may be on your mind. Moving to the islands is different than many other moves, with a variety of factors that make it unique.

Your expected timeline is one of the most important factors as you consider whether to rent or buy a home in Hawaii. The best real estate investment is one that you will keep for at least 5 years, whether you intend to live in it the entire time or leverage it as an income property for part of that timeframe. If you are not in a position to buy something that will work for you for 5 years right now, it may be best to rent temporarily while you set yourself up to be in a position of strength to invest in something more long term.

Many people move to Hawaii for a job or to experience a new lifestyle, but are not sure exactly which part of the island they want to call home. If this is you, renting might be the right choice for a short time while you explore the island.

In general, single professionals or couples without pets and children will find it easier to rent a home. If you are looking for a home with children and pets, it will be far easier to buy than rent. This doesn't mean you absolutely must buy if you have kids or pets, but think more carefully about the plan if this is your situation.

If you have pets, remember that not all landlords will allow them in the home. This will greatly limit your options. With kids, renting a home is still a great option for many families, but it will be in their best interest to try to move to the neighborhood you ultimately intend to settle down in. This will provide the kids with a chance to stay in the same school and get to know friends that live nearby.

You might hear people talking about how now is not a good time to buy, or that the market is in a bubble. This may have some truth in some markets, but Hawaii in general is a place with inherently limited supply and a steadily high demand for housing.

While there are some cases in which renting will be the right choice before buying in Hawaii, a "housing bubble" is not a good reason in and of itself. Real estate professionals on the islands do not interpret the data to indicate that there is a housing bubble. The housing bubble many of us remember in 2006 was created by risky lending practices that simply are not in play today, so these high prices are now a reflection of supply and demand rather than artificially inflated prices due to shady loans being given out.

Want my simple, no-nonsense, financial advice on housing? Consider your monthly housing expenses (whether rent or a mortgage) to be your payments for a place to live. Spend accordingly, and save, or invest, the difference.

Many homes and condominiums built before 1978 have lead-based paint. Paint that has chipped or is deteriorating, or on surfaces that rub together such as windows and doors, creates lead dust which can pose serious health hazards to occupants and visitors. Homebuyers and renters have important rights to know about whether lead is present -- before signing contracts or leases.

As owners, landlords, agents and managers of rental property, you play an important role in protecting the health of your tenants and their children. Buildings built before 1978 are much more likely to have lead-based paint. Federal law requires you to provide certain important information about lead-based paint and/or lead-based paint hazards before a prospective renter is obligating under lease to rent from you.

As real estate agents and home sellers, you play an important role in protecting the health of families purchasing and moving into your home. Buildings built before 1978 are much more likely to have lead-based paint. Federal law requires you to provide certain important information about lead-based paint and/or lead-based paint hazards before a prospective buyer is obligated under a contract to purchase your home. 041b061a72


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