After renting apartments and houses for years, I plunged into the property purchase process six months ago and bought a one-bedroom condo. Investing in property can be a sound financial decision for some, but for others, renting still holds plenty of merit. Whether you are a tenant or a homeowner, the debate about buying vs. renting roars on, despite the fact that there is not really a winner.
Renting and buying have respective advantages and disadvantages.
Many of us have been raised with the belief that buying a home is one of the necessary components to achieving the American Dream. After spending years in college and obtaining a dream job, who wouldn’t want to find a permanent place to call home? However, following the recession and the corresponding housing crisis, many people came to the realization that buying a home was not a smart financial commitment after all – especially if the mortgage terms were bad.
No matter what side of the buy vs. rent fence you stand on, there are advantages and disadvantages to both. For home buying advocates, there are a few key points that stand out:
Once you have paid off your home, it is completely yours with only maintenance expenses and taxes to be paid.
- You have the opportunity to make money on your investment should your home appreciate in value.
- The cost of owning a home may be offset by certain tax credits.
- You have more freedom to make changes and tailor your home to your needs and wants.
On the other hand, renters will stand strong in their corner because:
- When you own your home, you have to pay thousands of dollars in mortgage interest and taxes annually.
- Renting still provides you with a place to live.
- If you’re buying a home, you lose the chance to use the capital you have to spend for other investments or purchases (between your down payment, taxes, insurance, mortgage, interest and other costs, that’s not a small amount of money).
- Tenants are not responsible for paying for repairs, maintenance and other issues that may arise while renting a property.
Though the pros and cons of each decision stand on their own, this is not a black or white issue. A number of specific factors come into play when it comes to the buy vs. rent debate – factors such as mortgage interest rates, rent prices, and homeowners association fees. At the end of the day, there is no inherently smart or dumb decision. Making this choice comes down to individual factors on a case-by-case basis. By taking the time to look at those numbers and making careful calculations, you can determine the best decision for your living situation.
Some common factors involved in the buy vs. rent debate
If you are new to the home buying process, you may not realize all the associated costs, but there are a lot of them besides the purchase price of the home. This is an area where renters can benefit from not having to pay for maintenance and repairs or property taxes and insurance. When it comes down to specific factors in the buy vs. rent debate, here are a few factors to consider:
- Cost of housing in your area: If you are in an affluent area, it may be difficult to afford the price of a home. However, in some cities, the rental market is also extremely expensive. In that case, buying property may be a more prescient financial option.
- Opportunity cost of down payment: Depending on the price of the property, a down payment can amount to tens of thousands of dollars or even more. Instead of using that chunk of change for a down payment, think about the other investment opportunities you could undertake, and whether they could be more lucrative.
- How long you will live in your home: If you do not plan on staying in the same area for long, renting could be the better option. On the other hand, if you want to settle down, you can spread the costs of home ownership out over time, all while living in a space you can really make your own.
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Crunching numbers can provide you with a clear outlook on whether buying or renting is a more logical decision…at least on paper. But as we know, life does not always work out so objectively. Even after calculating that buying is a better decision based on rental rates, you may have to consider how much you have in savings, or how much debt you already have on hand. A two-income household may be apt for supporting a big decision like buying a home, but what if you or your significant other lose your job? That could lead to even bigger problems when the mortgage is due at the end of the month.
The Home Investment Myth
One of the common misconceptions about buying a home is that many people view it as investment. However, should you sign on the dotted line and purchase a property, you should treat it as just that: a purchase. Statistically speaking, the average price of real estate just edges out inflation rates over time. Unfortunately, many home buyers talk themselves into thinking their home is an investment and end up overspending on a property they cannot afford in the long term.
Though many experts view buying a home as a bad investment overall, that does not necessarily mean it is a bad purchase. Utilizing metrics such as the 20 percent rule (that you should not purchase a home that you cannot afford to put 20 percent down on) can be a helpful way to make sure you are making an affordable choice. You should also consider your household income, as you do not want to fall in the trap of living in a luxury home that leaves you with little left to spend on essentials or your other bills – although with the rise of Airbnb, there are other, historically unusual ways to use your home to recoup value.
The sense of satisfaction from owning a home is truly second to none, and that’s really where the major value is for many people. However, there are financial, emotional and logical factors to take into account when you are debating buying or renting.
In the end, owning a home is great – as long as the home does not own you.
