Many people believe that owning a home, assuming you can afford to buy a home, is always the better choice over renting. Not necessarily so – there are many factors to consider.
Advantages of owning a home
Purely emotional reasons. This should not be discounted as a factor.
Possible deductions for mortgage interest and property taxes depending on income and your overall tax situation, and also dependent on the state in which you live or are thinking of moving to.
Fixed cost in recurring mortgage payments provided you get a 15 or 30-year fixed mortgage.
Possibility of building equity. Contrary to popular opinion, this is not guaranteed, and depends greatly on where the property is located.
Stability. Assuming you pay your mortgage on time you can’t be forced to move except under unusual circumstances.
Option of getting a reverse mortgage when you’re much older and have built up substantial equity.
Disadvantages of owning
Requirement of a down payment that could strain or exhaust your financial resources.
Upfront purchase costs including realtor’s commissions. That money is gone forever.
Ongoing costs of maintenance and repair, typically 1% – 4% annually of the value of the home depending on its age. And frequently not considered by new buyers.
Ongoing time required for maintenance and repair. Don’t underestimate this.
High probability of future rising property taxes.
High probability of future rising homeowner’s insurance premiums.
Lack of liquidity. You cannot easily and quickly convert your house to cash.
Advantages of renting
Flexibility. It’s much easier to move to a different rental than selling a house and moving elsewhere. You might surprised at how many times people on average move to other residences.
Liquidity. Since you do not have money tied up in a down payment for a house or tied up in the equity of a house, you have greater control and more options of what to do with that money. Don’t underestimate the importance of this.
Possible lower monthly cost. See the financial analysis below.
No hassle maintenance. If something breaks, it’s someone else’s problem to fix it.
Upscale amenities usually not found in homes: gyms, swimming pools, movie theaters, basketball courts, and wine cellars.
Disadvantages of renting
Emotional – “I’m throwing money away”. Not really valid: you’re spending money on a place to live as contrasted with spending that same money on something else.
Potential loss of control. Possibility of eviction through changes in ownership of the rental.
Exposure to rising rents over which you and other tenants have little if any control.
Less flexibility in choosing neighbors. Another one not to underestimate.
Financial analysis – the Price to Rent ratio
Here’s a way to look at this more objectively. Go to Zillow and find the median home price and median monthly rent for the area you’re interested in. Divide the median home price by the median annual rent to give you a price/rental number. The number could be anywhere from 12 to 25.
Now take the sale price of a specific house you’re interested in, find a rental in the same area that’s roughly equivalent to the house, and then compute the price/rental number.
The higher the number compared to the median P/R number the more you should consider renting. You can compare the two numbers – the median P/R number and the house-specific P/R number to get an idea as to whether the house is reasonably priced for that particular area.
Possible outcomes of your financial analysis
1) The costs of renting and owning are comparable. With no clear financial advantage with either choice, I would spend some time defining where you expect to be and what you expect to be doing in 3-5 years. The more uncertain your future, the better renting looks as it avoids all the sunk costs that come with purchasing.
And it doesn’t tie up money in a house in the event of an unanticipated downturn in housing prices like the US experienced in 2008/2009. This could happen again and could be initiated by a nationwide credit crisis.
2) The cost of renting is higher than the cost of owning on a monthly basis. First thing I would do is ask “Why?”; what is it about the local market that is causing this? If the answer is acceptable, then I would consider buying, but only after I had done the 3-5 year exercise mentioned in the previous paragraph.
3) The cost of owning is higher than the cost of renting on a monthly basis. I’d choose renting to give you the maximum flexibility and options. It gives you the opportunity to familiarize yourself with the entire area relative to costs, traffic, and school systems, while monitoring price changes in neighborhoods of interest.
And you can save or invest the difference in the cost between owning and renting in the meantime.
Recommendations for deciding
Consider both the emotional aspects and financial implications.
Be clear on your assumptions, including how long you expect to live there.
Do the price/rental analysis.
If buying, buy the least expensive home that meets your needs in an area that has the greatest potential for appreciation. Do not be swayed by realtors who try to get you focused on the most expensive house you can “afford”. Never buy into the sales pitch “you’ll grow into it”.
If renting, try hard to save the money you expect to save having made the decision to rent rather than buy.