How To Talk to Clients About Buying vs. Renting

Advice for financial advisors ahead of client meetings

Fact checked by Suzanne KvilhaugReviewed by Samantha SilbersteinFact checked by Suzanne KvilhaugReviewed by Samantha Silberstein

The real estate market has felt predictably unpredictable since the huge spike in home prices between 2020 and 2021. Rising real estate prices combined with higher interest rates may have more clients than ever coming to you for advice on whether they should rent or buy. This article and the corresponding downloadable guide linked below can help you prepare for such conversations.

Download: Client-Advisor Discussion Guide: I Need to Move. Should I Rent or Buy?

Key Takeaways

• Consider using a pre-meeting questionnaire to get current information from your clients about their financial health, goals, and timelines. 
• Portfolio modeling is a helpful tool to illustrate how buying a home impacts future goals.
• Use the price-to-rent ratio with the client to determine if it is cheaper to buy or rent.
• The tax advantages of owning a home are only tax advantages if clients itemize their deductions. 
• Advisors do not have to know all the answers; they just need to know where to find reliable, trustworthy information.

Client: “Am I in a Financial Position To Buy?”

Before you get too far down the rabbit hole with your client, you can run the price-to-rent ratio to show them whether it is cheaper for them to buy or rent right now. Cheaper does not necessarily mean it is a better decision for your clients, but it demonstrates what renting vs. buying looks like in dollars and cents. 

The pre-meeting questionnaire will be tremendously helpful to you in answering this question for your client. Whether this is a client you have seen every year dutifully for the last 15 years or they’re brand new to your practice, you can’t answer this question without knowing a bit more about their expenses, savings, and lifestyle. Just because your client has some money put aside for retirement and other goals doesn’t mean they don’t have debt or other financial considerations to bear in mind.

You need to be a detective here and ask the sometimes uncomfortable questions about debt, expenses, and savings before providing a helpful answer.

Tip

Remember that buying a home comes with more expenses than just purchasing the house. Your client may discover that their planned home purchase is a bit of a budget stretch after including the extra expenditures. 

With the right financial planning, your clients can see their investments grow. By using modeling software, you can show them how regularly investing money can help their portfolios grow through dollar-cost averaging. Creating a new account for future expenses could also lead to significant growth. Conversely, they can also see how managing their mortgage payments within their affordability comfort zone can help them pay off high-interest debt, putting them in a better financial position in the future. 

Client: “What Are the Tax Benefits of Home Ownership?”

As a financial advisor, you don’t need to be an expert on everything, but you do need to know where to find reliable, factual information to guide client discussions. Understanding the IRS guidelines on tax benefits from home ownership is crucial before giving any advice. Because of the complexities of taxes, you should have a referral to a tax professional handy if they have more in-depth questions than you can’t answer. 

You and their accountant can sing about all the tax benefits of home ownership, but the long and short of it is that clients don’t receive real tax benefits if they don’t itemize their taxes. 

Clients coming to talk to you about buying vs. renting probably are not interested in a full presentation on investments with tax benefits. However, it is a good idea to prepare a few talking points about ways your clients can get tax advantages from other sources, like investments. 

Client: “If I Need To Withdraw Money From My Accounts To Pay for a Down Payment, How Will That Impact My Future Portfolio?”

The best way to show your client the impact of withdrawing money from their investments or savings for a down payment is to use software to model it. It’s hard to understand the power and impact of compounding interest without seeing it written in black and white on paper. Obviously, you’re not trying to discourage your client from taking their money if that’s what they need or want to do, but you want to ensure they’re fully informed. 

Your clients may come in with ideas about which accounts they want to use to fund a down payment. Many people are aware of the Roth exemption for first-time homebuyers, but they may not be familiar with borrowing from their 401k or what impact taxes will have on withdrawals from any investment accounts. 

Note

You may need to model multiple scenarios to help clients determine the best account to withdraw from for their down payment. This will reassure them that they are making an informed decision about buying vs. renting.

Client: “If I Buy a Home, How Will This Affect My Ability To Meet My Future Goals?”

The pre-meeting questionnaire and the comprehensive understanding of your client’s updated future goals, timelines, and risk tolerance are critical to allow you to provide them with informed advice. The answer to the question of the home purchase’s impact on their financial goals is not straightforward. It depends on various factors such as their mortgage’s effect on prior savings, the amount invested in the home, the market conditions at the time of sale, and many others. However, with your guidance, your clients can make a well-informed decision, even without a crystal ball. 

You can use what you know and estimates based on past performance to show your clients how buying a home can affect their ability to meet their future goals. Home prices have been having a bull run over the past couple of years, but houses typically appreciate in value over the long run, even if the market corrects. Owning a home may create a profit for your clients when it’s time to sell, so remember to include that in your modeling. 

This meeting is also an opportunity for you to emphasize the power of compounding interest, particularly if they plan to sacrifice their current savings goals to fund the purchase of this home. 

The Bottom Line

The last few years’ higher home prices and interest rates have made more clients unsure about whether to rent or buy, and they need advice. Advisors should prepare for their meetings with information about trusted tax advisors and familiarize themselves with current housing market prices in their area. Tools like pre-meeting questionnaires and portfolio modeling can help advisors address their clients’ concerns about the impact buying a home will have on their financial health. 

Read the original article on Investopedia.