Renting beats overpaying for homes

April 02, 2006|By THE DENVER POST

Conventional wisdom holds that buying a home is always better than renting.

But conventional wisdom could be luring many people into financial harm, claims Chicago author and financial adviser David Latko.

"Go over the numbers," Latko advises. "If people do it right, it doesn't make much difference if they rent or buy."

Latko, a talk-show host and author of the book Everybody Wants Your Money (Collins, $22.95), admits he offers a contrarian message.

In many markets, the cost of homeownership has risen far beyond what a home can generate in rent, making it smarter for people to rent now rather than buy. Historically, home prices have risen only 1 percent to 2 percent more than the rate of inflation, but in some parts of the country they have grown at double-digit rates.

Low mortgage rates and speculative purchases have supported the home market. For appreciation to return to historical rates, however, prices would need to drop or stay stagnant over a long period.

Even when prices are appreciating quickly, homeowners must sell in order to pocket their gains. Most immediately invest their earnings in larger properties whose prices also have risen quickly.

As interest rates continue to rise, housing markets could chill so much that recent buyers can't recoup what they paid for their homes. Those most susceptible to falling markets are people who put little money down on their properties and have to get out quickly.

Many first-time buyers underestimate what it costs to own a home, and lack a cushion if things go wrong, he said.

Renters can come out ahead of buyers if they are disciplined enough to invest what they save and wait for the right opportunity.

"Real estate is like most other investments," Latko argues. "When everybody can't get enough of something, sell them all you have. When nobody wants it, buy all you can."

He speaks from experience as an investor who got caught in the hype of Chicago's Gold Coast condo market. The "once-in-a-lifetime" purchases he made in the early 1980s required him to wait 15 years just to break even.

For those who do want to buy, Latko recommends looking for bargains and staying away from anything new.

Builder's profit margins can run at 20 percent or 25 percent above the cost of building a new home, he said. If builders have to cut prices in a slow market, their previous customers are the ones who suffer the most.

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