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Where your housing meets your financial planning
In many ways where you live is the primary driver of your financial status, and part of the decisions you make in that regards involves not just the physical location, but also the role that housing plays in your financial planning.
So let’s talk about that.
Rent or Buy
Probably the single most important decision you can make in regards to your financial life is whether or not you should rent or buy a house to live in.
I want to be crystal clear here:
There is no one size fits all
Both renting and buying are valid decisions for people to take, and which one you should take will heavily depend on a number of factors, including:
How long you plan to live there
How expensive the rent is
How expensive the purchase is
How expensive the cost of capital is
How you personally feel about the responsibilities of home ownership
How concentrated would your net worth be in your house
There are many other factors to take in when it comes to deciding to rent or buy, but at the very least you must take into account those factors.
Personally I’m currently considering whether or not to purchase a home, and I’m leaning towards it so long as the following applies:
The yield I’m getting is at least higher than 5%
My personal life will settle down in a couple of years
I’m reasonably financially stable
I will do it together with a spouse
I like where I live
This kind of brings up my entire life plan, right?
I don’t want to buy a house just by myself because it doesn’t really make sense to limit myself and my career, but once I fully settle down, get married and have kids, having stability as to where I live and work is a must, and so some of the downsides from home ownership are no longer as relevant.
So at least for now the house purchase is expect to happen in the next couple of years, rather than the next 6 months.
This means I have some time to find a decently yielding property…
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So how do I calculate the yield?
The easiest way to do it is simple, see what the home is replacing!
First we need to determine the “Minimum Required Yield”, this is the minimum return you should be willing to accept, and will change over time.
I generally use 5% for this, but you may want to use a higher value. The 5% are broken down into:
1% for Maintenance and repairs
1% for Taxes and fees
3% for cost of capital
Take your monthly rent, multiply it by 12 to get the annual expenditure, and then divide it by the minimum required yield:
Of course this means you need to know what your “Monthly Rent” actually refers to, which isn’t that easy to determine.
I live in Germany, so there is something called “Cold Rent” and something called “Warm Rent”.
“Warm Rent” usually includes the “Cold Rent” plus water usage, and common expenditures for the building.
Since you’ll have the “Warm” expenses whether you own the home or not, there’s no real point accounting for it, so I use the cold rent.
If there is no clear distinction on your rental agreement, then try and get a ball-park estimate for those expenses.
For me, I spend about 800€ in “Cold Rent” a month, which means that with a minimum required yield of 5% I get these values:
This means that the maximum I should pay for a home to replace my current apartment should be 192 thousand euros.
Of course this doesn’t account for certain expenses, such as depreciation, property taxes, maintenance, etc… So ideally I would purchase below this value.
Still, 192 thousand is just about my maximum, and I am looking for places that cost under that.
If I can’t find any… Then I will just continue to rent and simply take advantage of my landlords decision to provide me with affordable housing!
What about you?
Where does housing stand on your life plan?
Let me know below!