Buy? Rent? A young saver's dilemma

This recent grad is already thinking about his financial future. Should that include a home purchase?

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: I'm a recent college grad and now a young working professional making $39,000 a year who's at a crossroad in life: I'm moving away from home and have to decide whether I should buy or rent a home.

I find it hard just to pay rent, but when I think of the down payment, closing costs, taxes and homeowners insurance, all I see are $$$ signs. I'm also a little concerned about the uncertain housing market.

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My only big expense is the new car I recently bought, and if I do buy I think I can get two friends to move in to help with the mortgage cost. But I'm still not sure if buying or renting is the right way to go. What do you think?

- Pat, Havertown, Penna.

Hey, what's the rush about buying a house? If you've just finished college and are moving out of your parents' place, why not take some time to get your career going, save some money, build a 401(k) or other retirement account going and then think about buying a house?

I say this not because I'm down on the joys of home ownership. I think having your own hacienda is great. It makes you part of a community and over the long term the appreciation of home values can be a great way to build wealth.

But buying a house involves shelling out a fair amount of upfront costs - the down payment, title insurance, mortgage application, etc. - not to mention a commission when you sell.

Closing costs for buyers average about $3,000 in the United States. Selling the house is even more expensive. With brokers commissions alone averaging between five and seven percent, expect to shell out close to 10 percent of the price of a home when you sell; that's about $20,000 for a median priced house.

In most markets, most of the time, buyers have to hold on to their properties for at least two years just to offset the effects of those transaction costs. The faster prices rise, the sooner buying a home pays off. But, since most experts expect market prices to be fairly stable for the next couple of years, even fall in some areas, renting could work out to be cheaper for a while, especially if rents are reasonable compared with home prices in your area.

Given all that, it generally only makes sense to buy if you're sure you're going to be staying in the same place at least five years or longer. And with the latest reports showing that housing prices are stagnant or falling in many areas of the country, buyers might even want to figure staying put a couple of years on top of that.

But you're young. So do you really know where you want to live for the next five or so years at this point? You might very well want to take a job in another part of the country. Or maybe you'll just want to try living somewhere else. You can still do those things if you own a house, of course. But it's easier if you don't have to worry about selling your home or renting it out while you're gone.

More important than home buying

That said, I don't want to give the impression that you should go rent some lavish bachelor pad and live large until you're ready to settle down and buy a home. Au contraire. This is the time to establish good financial habits that can put you on the path to financial security for the rest of your life. What kind of habits am I talking about?

The biggest is regular saving. Start by putting aside enough cash in a money-market fund or short-term CDs to cover three to six months of living expenses. This reserve can tide you over if you lose your job or find yourself saddled with unexpected expenses.

Your next priority is contributing to your company's 401(k) or other savings plan (or an IRA if your company doesn't offer a retirement savings plan). Yes, I know retirement seems like a far off mirage now. But it will arrive one day and the earlier you get started saving for it, the better off you'll be. If you don't believe me, must ask one of your colleagues at work who are in their 40s or 50s if they wish that they'd started putting away bucks sooner for retirement.

I recommend that you try to save at least 10% of your income, 15% if you can manage it. This will not only help you jump start your retirement nest egg, it will also get on board with one of the most important principles of personal finance - namely, the single best way to build financial security is to accustom yourself to living on what you make after you've saved for your future.

If you base your lifestyle on what you actually make - or, worse yet, spend beyond your means by borrowing as many people do - you'll never accumulate wealth and you'll never be able to retire in comfort.

Which brings me to my final point. Saving is a lot easier if you keep a rein on spending. When you rent an apartment (or a house with some friends), find a place that's comfortable, but not lavish, and that's in a decent neighborhood, but not the most fashionable. The less you pay in rent, the more you can save.

In closing, I'll mention one more thing. You say you've bought a new car. Okay, fine. It's nice to reward yourself with a little splurge when you're starting out. But get all the miles you can out of this car. Don't be one of those people who feel they've got to trade up to a new model every three or four years. That's okay if you don't mind paying a lot of cash for status or to enjoy that new-car smell, but not if you really want to own a house and become financially secure.

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