Meritage Periodical August 2023 Please join us in welcoming Walt Buettel to Meritage! Walt recently joined us from Voya Financial Advisors. As part of the Meritage Team, he serves as an Associate Wealth Management Advisor, where his day-to-day client interactions are focused on implementing clients’ financial planning goals and monitoring progress.Walt worked for Voya Financial Advisors for 14 years as a Financial Planning Consultant. He has earned the designation of Chartered Retirement Planning Counselor, enabling Walt to provide clients in all stages of life with a comprehensive road map for retirement. He holds the FINRA Series 7, 63, and 65 registrations. He is also a licensed life and health insurance agent. Walt graduated from the University of Connecticut with a Bachelor of Science in Economics.Outside of the office, Walt enjoys spending time outdoors running, skiing, and completing triathlons. Walt resides in Marlborough, CT with his wife, their children, and their dog. Learn more Advisor PerspectivePrompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.Keep "wasting" money on rent!We work with a number of people who are currently renting, and owning a home is constantly on their minds. A significant portion of their income is going towards rent, which leads them to feel like their landlord is winning and they’re losing. Additionally, most are dealing with some level of pressure from friends and family about when they will purchase a home. Nationally we have a housing shortage, and rising prices and mortgage rates have made it more difficult than ever to purchase a home. At the same time, it’s much harder to accept paying rent when rental rates are also rising rapidly. According to Yardi Matrix, renewal rents, the change for residents that are rolling over existing leases, rose 8.1% year-over-year nationally in May. We live in a world where many people talk about homeownership as an investment. As a result, many renters feel like they would shift from wasting money to investing money if they owned a home. As financial planners, we would like to debate that logic. Every homeowner assumes material costs that are difficult to label as investment dollars. To start, all homeowners assume responsibility for real estate taxes and maintenance expenses. Most homebuyers will also assume a mortgage to purchase their property. A portion of that mortgage expense will go towards building equity, but another portion will be interest expense paid to a bank. Depending on how the mortgage is structured, the bank may collect more interest than you will accumulate in equity. In general, we tend to ignore these cost items and not compare them to rent. We thought it would be helpful to our clients who rent to share a real-life financial analysis for a couple we work with.They are both very successful in their careers and have a high combined income, but they live in a metropolitan area with home prices that are much higher than the national average. Their current lease will soon be up and so the discussion of renting or buying has been a daily conversation for them. Very recently, a house that had been listed for rent was just relisted for purchase which provided them an apples-to-apples comparison on renting versus buying. The house was originally listed for rent at $3,000 a month and just listed for sale at $1,150,000. At their income level, these clients were pre-approved for a much larger mortgage amount and so this home felt in reach, and they were excited about building equity rather than paying rent. They asked us to validate their decision. So, we helped them analyze the cost of ownership:The real estate tax bill for the home was $15,820 per year and the current owners are paying $4,030 per year for homeowner’s insurance. So, these two costs alone combine for $1,654 per month before financing the purchase or assuming the risk of any home maintenance.These clients do not have enough saved for a 20% down payment, which is generally necessary to avoid paying private mortgage insurance (“PMI”). However, in our analysis we ignored the potential cost of PMI to keeps things simple and assumed they would finance the entire purchase. We assumed a 30-year fixed rate mortgage with a rate of 7.0%, which may or may not be attainable today. We calculated that their monthly mortgage payment would be $7,651.Before factoring in any potential maintenance expense, these clients were facing about $9,300 per month in ownership costs versus $3,000 for renting the same home. Initially, they did not object to this as they felt like they were at least investing the difference and they expect this home to continue to appreciate. They asked us how much it would need to appreciate in the next 10 years to make it a good investment.We calculated that if they stayed in the home for 10 years, they would have only paid down the principal by $163,157, but they would have paid the bank $754,960 in interest. So, to just not lose money over a 10-year period the home would have to appreciate by $591,803 or 51%. This is about 5% per year on average and we all agreed that this level of price appreciation may happen. Unfortunately, this would not be a good financial outcome as it would mean achieving 0% rate of return and sure loss of real value when you factor in inflation over that ten-year period.These clients have decided to stick with renting for now as they quickly realized buying would be banking their entire financial future on whether the value of a single home appreciates. They also came to realize that they didn’t want to assume the risk of a price decline.After three years, they would have only paid off about $38,000 of the mortgage principal which isn’t even enough to pay for the cost of a realtor if they want to move.The point of sharing this story is to provide perspective on renting versus owning. We all have to spend money on some form of housing. The type of housing and whether we own or rent it is fundamentally just a choice about how to spend your own money. Culturally, that choice is widely judged, and renters are often viewed as less upwardly mobile. The truth may be quite the opposite and the goal of this piece is to send a message to renters: the world may be telling you you’re wasting money on rent, and in reality, you may be the one with the financial upper hand. If you have any questions about your personal situation, we are always here to talk. To subscribe to the Meritage Periodical, please enter your name and email address below. Name Email Address Thank you! Oops!