Wait or Buy?

“With rates going up & prices so high, should I rent or should I buy?”

It’s a great question. Buying has more risk, & possibly even higher cost.

But what happens over time? Take a look at the scenario (inset).

Assuming for conservative estimates, If you were to rent or purchase a $500,000 home, over a five year period you would be significantly better off having purchased than paid rent. Here’s how:

If you could rent that house for $3,000 / month or buy it with a $400,000 mortgage that costs $3,717 per month (a full PITI payment at 5%), the following will play out over a five year period:

Your cashflow will average out to $293 less per month (in the purchase), but after five years, your net worth will have increased by $157,772.

Rental prices increase every year, so by the time you get five years in, your rent for that same house will be more expensive than the mortgage payment.

Remember: paying rent is paying 100% interest. You’re not building wealth. You’re not buying real estate—well, for yourself anyway. You are buying real estate for your landlord.

Note: This is already accounting for all closing costs & realtor commissions involved in selling the home in 5 years time. I.e., that amount has been subtracted from the prospective net worth.

But what about interest rates?

No doubt: it’s rough.

This chart shows how much mortgage prices have fallen in the last two years. (When prices fall, rates rise.) Since May of 2020, it’s been pretty much all downhill. June of 2022 hit lowest levels (read: highest rates) in decades, and they’re trying to rally but still a long way from where we were 2 years ago with historically low rates.

The scenario at the top of this blog reflects interest rates that are current as of August, 2022—about 5%.

Even though that’s 2 full points higher than it would’ve been 2 years ago, it’s still better off to buy a home with a relatively high rate than waiting to rent until rates (or prices) come down. I’d rather get my foot in the door and begin building equity sooner than later. You can always refinance once rates come down, and rates will come down eventually. If you wait until rates come down, the prices will have gone up due to appreciation that you may not be able to afford the house by then anyway!

The bottom line: Rates will fall. Prices will keep rising.

Again, allow me to remind you of one aspect of the AIO. In the AIO, I simply don’t bother with what my rate is. Sure it’ll affect things slightly, but its effect will be marginal compared to my monthly income and residual funds left in the account after paying my bills. Additionally, if I’m in the AIO and rates do come down, so will mine anyway.

In summary: You’ve got nothing to lose in the AIO, assuming you are cash-flow positive.

You’ve got much to lose by staying in a holding pattern of paying rent. Time to get free!