Make Cents Blog

There are only so many ways to kick start a project, so if you find yourself having difficulty executing, you should try to stay on the K.I.S.S. (Keep It Simple, Stupid) methodology!

Let’s say you have an idea, and the idea is to pimp a mobile phone and charge a lot of money for that. The first thing we need to extract out from the idea is – What is the 1 most crucial task to success here? And the answer is, “To have able to pimp a mobile phone.”

The workflow immediately begins:
1. Can you pimp a mobile phone yourself? If Yes, you should start doing it. If No, go to 2. If you want to answer this later, sit back on your couch, go to 4.
2. Do you want to / Can you find someone who can pimp to partner with you? If Yes, go find the partner. If No, go to 3.
3. Do you want to pay someone to pimp for you? If Yes, go find a qualified candidate and pay him to do it. If No, sit back on your couch, go to 4.
4. End.

If you are one of those who like to ponder on ideas to make more cents for your family and yourself, I applaud and encourage you to continue to do so. But it is very important to understand that, an idea has no value until it gets executed. So although having an idea is the most important FIRST STEP, its fundamental value only stays at the phase of the FIRST STEP. If you don’t follow through and take it to the NEXT STEP, the value will gradually decrease and the idea may ultimately become useless.

Obviously, there are many steps to follow, even after you have successfully started a project, before you can take it to the finish line. But most people struggle on starting the project so don’t try to think too far ahead (especially if you are one of those who are not very self-motivated).

Starting a project adds a critical ingredient to success of this project, that is called “momentum.” A project getting stuck at the idea / brainstorm phase cannot gain momentum, while a started project which is in motion, can.

If you have a project idea that is at idle mode now, you certainly should dust it off and consider starting it!

Do you ever wonder: You are currently renting a place for $1500 a month, most utilities are paid for, no need to tie up that big chunk of down payment, no need to pay property tax annual. Why do you ever want to buy a property?

From a sentimental perspective, owning your own property can be considered one of the major accomplishments in life, and that itself is priceless.

But taking the sentimental part out of the equation; from a financial perspective, how can I know if it makes cents to buy?

The answer is Rent Parity Analysis.

To give credit to where is due, a good friend of mine who is good at crunching numbers actually brought this concept to my attention.

Rent Parity Analysis, in its simplest term, means it is a mathematical comparison to see if renting is costing you more, or owning is costing you more. I don’t think anyone has come up with a “perfect” analysis formula yet; but generally speaking these are the factors you need to take into consideration:

For renting:
1. Since you don’t need to tie up a down payment, you need to consider the potential ROI on that amount of money if you were to invest it conservatively. (5-8% a year?)
2. You need to account for increase of rent, as rent tends to go up every year.

For owning:
1. You need to consider the tax savings on mortgage interest and property tax.
2. You need to budget in an annual maintenance costs although you may not need it at the end.
3. You need to include all the utilities charges that you would have not needed to pay if you were to rent.
4. You need to factor in the property tax and insurance obviously because this is not something required for renting.

For a more practical analysis, you need to compare apples to apples. This means don’t compare your current bachelor pad of 600 sq ft with no bedroom in the ghetto area, with your 2500 sq ft 4 beds 3 baths dream house in the upscale neighborhood. As you know, you can never reach rent parity because of the extreme difference in condition.

What you need to is run some comps and locate a property that has similar qualities of the house you are intended to purchase. For example, if you want to buy a 3 beds 2 baths to begin with, check out how much the adjacent rentals are going for, same number of beds and baths, similar square footage, within a few blocks.

Obviously, there are other factors you need to consider, like the speculation of property value appreciation (or depreciation), the concept of having a “home” (not so much sentimental, but more to give you a sense of responsibility), and the possibility of owning a piece of property “free and clear” (aka do you want to pay rents forever?)

Renting and Owning are not for everyone. But in the quest of arriving to your decision, Rent Parity Analysis can certainly help make some cents from the mathematical standpoint!

People often ask, “When is the right time to buy a property?”

My canned response is, “If you are buying it for OO (Owner Occupied), any time (like now) is good. Based on statistical history, house values will always go up over a long period. If you are buying it as investment, you buy when the numbers make sense.”

They often will question, “What if I buy now and the price goes down?”

I go, “Are you trying to buy when house prices are at the bottom?”

“No, I am mature enough to know that we cannot time the bottom. But what I want to do is, I want to wait until it is at the bottom, and then bounce back to the uptrend, and that is when I want to dive in and buy.”

I can’t stop myself from wondering, “Do you know what you are really saying here? Not only you want to catch the bottom, but you also want to make sure it is going back up so you are guaranteed a profit? Isn’t that what the entire world is wishing to achieve also?!”

People often understand they don’t have the knowledge to “bottom fish” the real estate market; but what they do not understand is, it is even harder to time a market that reaches bottom and then coming back up! It is almost impossible.

Of course, we can always wait for that to happen. But unless we are really determined to watch the trend daily, and follow what is going on in the market daily, waiting is just another excuse. We will eventually fall into this “endless wait loop”, while others are already making money left and right because they choose to do it.

Nobody can tell when is the “right” time to buy, or the “bottom” of the market. Each person’s situation is different. You will need to evaluate your situation, including but not limited to:

- What is your purpose of the purchase?
- What is your financial ability to purchase?
- What is the duration you plan to hold this piece of property?
- How much risk / downside are you willing to take, financially and mentally?

It is not exactly a Yes/No/Go/No Go flowchart, but learning more about yourself will certainly help you make the decision!