Should you rent or own post-divorce? That’s a tough decision. Let me help you view this question a little differently to help you make a decision that’s best for your situation.
Ideally, we would like to keep the matrimonial home. The last thing we want to do is let go of all the memories we’ve made there, uproot the kids and face another major change. The problem is the cost. Maintaining the matrimonial household AND your ex maintaining his own house is not exactly feasible for many divorcing couples.
The reality is most couples end up selling the matrimonial home and each downsizing to accommodate a maxed out budget. But it’s not all bad. It is a hard transition, but many claim that selling the matrimonial home was the best thing for them. It allowed them to let go and move forward.
What is best for you? Is it buying a new home or renting? Renting has a stigma attached to it that says ‘ a person who rents is too poor to own’ and ‘you’re throwing away money every month that you could be putting toward a home’. Rarely do we hear about the upside of renting, whether it’s an apartment or a house. Also, rarely do we hear about the hidden costs of owning a home. Let’s flip that stereotype.
First to decide whether to rent or own, answer these 3 questions…
1. What is my current income? Will it decrease in the next few years? Consider the financial burden of divorce including legal fees and division of assets, as well as your current work situation.
2. Is my city’s real estate market inflated? If you live in a city that is notoriously the most expensive real estate in your country, then it is likely you live in a real estate bubble making buying a home ridiculously expensive.
Real Estate Bubble Defined (Wikipedia)-A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It can be identified through rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline.
3. Are the costs of owning the home more than my annual income?
If you answer yes to any of these questions, you would be wise to rent rather than buy. For example, if your income is less than it will cost you to own a home you will be behind the eight ball financially, unable to afford living expenses. On top of being house poor, there is no guarantee your property will increase in value over time, making up for those losses. Especially if you live in a city with the most expensive real estate in the country, the chances of your property increasing in value in the short term is unlikely. The market may be in a peak right now and the last thing you want to do is invest in the market at its peak.
Factor in the additional costs to own… It’s not just the mortgage…
1. Property taxes; likely a minimum of $200/month and can increase without warning.
2. Home Insurance; usually around $100/month.
3. Maintenance costs; even for a home that has nothing wrong with it, plan on spending $100/month for ongoing maintenance such as yard, small repairs, major cleaning (furnace & carpets), and exterior upkeep.
4. Interest on mortgage; the % interest you pay to borrow the money to buy the home, over a number of years this can add up to a significant figure and will never be recovered and does not contribute to the principle or equity.
5. Condo fees; these can be s much as $300/month and you have no control in the amount. Again, this is money that doesn’t contribute to your equity.
6. Unexpected costs; a new roof, replacing windows, a broken furnace all of these things can happen at any time depending on the age of the home-$100/month for a contingency fund should help cover these costs and that’s in addition to #1.
If your annual income is greater than the costs of the mortgage and extras, with enough left over for living expenses, then buying might be a logical option for you. If you live in a city where the buyer’s market is reasonable, your home purchase may prove to be a solid investment reaping returns within 5-10 years. However, if you cannot afford to own a home you will not be doing yourself any favors by going into debt with a large mortgage with absolutely no guarantee you will be able to sell the home for more than you bought it for. You may not be able to recoup your costs and worst case scenario, you may not be able to pay off your mortgage. I know it’s a scary thought but in making the decision to rent or own, we need to be realistic. Here’s some good news…
The upside of renting…
1. You know what your monthly costs are up front. There are no additional fees. You do not have the added costs of maintenance, property taxes or condo fees.
2. You’re not responsible for the maintenance and upkeep.
3. You’re free to save and even invest money elsewhere. With your return on investments and savings, you’ll eventually have an opportunity to buy back into the housing market. Even better, you’ll be ready to buy when the real estate bubble pops and home prices decrease.
4. Renting offers a sense of security for a single woman. Your neighbors are close by, your apartment is secure (always rent on the third floor or higher) and you are not as vulnerable to burglaries.
5. Renting is ideal for a co-parenting situation. A home that seems just right when the kids are there can seem far too empty in their absence.
Letting go of our home we raised our children in can be traumatic. Often rentals and homes we can now afford are much smaller or older. Try not to let that discourage you. Viewing apartments can be depressing after living in a large three bedroom home but there are some gems to be found. A smaller space can be a blessing. It costs less to decorate and you can make it super cozy. Just thinking of the money you’re saving can make you feel cozy, right?
So, the question is not simply should you rent or own but rather, what makes sense for you? It is a personal decision and should be based primarily on your income and the current real estate market in your hometown. Doing a little number crunching before making the decision will surely make for a more stable future for you and your kids.
Remember, renting is not a terrible option for a temporary arrangement. While you may have to sacrifice space, it allows you more financial freedom. Who’s the winner now? You!
The cliche is true, no matter where it is or how big it is; “Home is where the heart is.”
Did you have to downsize post divorce? Do you rent or own? Leave a comment, I LOVE ’em!