Should You Rent or Buy a House
Owning a home has always been believed as the best representation of the American Dream. You get to have a property with perfectly-manicured lawn; white picket fence and an abode you get call Home, Sweet Home. But apparently, there’s a shift in perspective towards home ownership over the past years and more and more people, especially the current generation, are asking themselves: Do I rent or buy a home?
Apparently, this dilemma does not come with a standard, universal answer. More than two decades ago, people knew what life trajectory they wanted to pursue, and each milestone had a designated time frame. The typical plan was to finish school, get a salaried job, get married, buy a house, have kids and enjoy the rest of your fruitful years.
Now, the times have changed. According to studies conducted by Harris Poll, more and more Americans are putting homeownership to the backburner. Additionally, the Joint Center for Housing Studies of Harvard University found that the rate of homeownership has been dipping down over the years. In 2015, homeownership rate fell to a whopping 63.5%.
Now if you find yourself torn between renting and buying a home, here are the most pertinent questions you should be asking.
Renting Vs. Buying – Questions You Need to Ask
How Long Are You Staying Put?
It’s conventional wisdom for most people to believe that a home is a significant leading investment. However, the house being an asset depends mainly on so many factors, one of which is for long you plan to settle there. If you see yourself moving again within the next three to five years, buying a house at this time may not be the best option right now.
For homeownership to become truly profitable, you need to own it for long enough that you’re able to build equity. However, if you’re going to be moving locations every few years, you should consider renting for the meantime. If you’re set on buying a home, decide on a neighborhood you know you will love. Also factor in possible permanent relocation to your work or job.
Also note that when you sell the home you purchased just a few years back, you will not be able to command the best price due to lack of equity. In the first few years of homeownership, most of the payments go towards interest rather than the principal. Building equity is beneficial because you can use it later on for other financing purposes, such as when taking a home equity or credit line. And this equity is determined by the length of time of owning such home.
Also, it may even cost you more money to sell the house shortly after buying it, than staying in it for a couple of years. So it is wise to carefully determine whether you’re staying in this area for long enough that you’re able to build equity or not.
Do You Prefer Freedom Or Stability?
Homeownership gives you more freedom than renting does. If you don’t like the color of the walls, you can decide to change it without having to consult with a landlord (because you are your own landlord). You can renovate and basically do anything to your home (within legal limits, of course) because you own it.
On the other hand, renting can seem restrictive. Since the house is not your own property, you cannot do anything with the paint color, type of carpet or room size. It is the landlord’s call to make any functional or cosmetic changes to the property.
It also helps to know whether you want more freedom or more stability at this point in your life. If you’re the type of person who wants to travel every so often, homeownership is not for you right now. According to studies, the millennials are entering homeownership at a much later age than their parents for the main reason that they enjoy flexibility. The current generation is inclined to enjoying their freedom to move, and renting allows them to do this much easier than owning a home.
If you’ve come to the age when you want a steady, sure pace, homeownership sounds like the one for you. However, if you’re still thirsty for adventure and don’t see yourself staying in the same place for too long, consider renting.
Are Your Financials In Order?
Shopping and buying a home is a complicated process, with both hidden and upfront costs. It’s not enough that you know how much the house is and what your monthly mortgage will be. You also need to know all the associated costs related acquiring a home such as taxes, closing costs, maintenance and repair.
With that said, you also need to know where you stand financially and how owning a home or renting one figure out in your overall plan. First off, you need to know that you a 20% down payment require some serious saving, so you need to start doing that early on. Yes, you can buy a house with much lesser down payment, but that also means spending more on private mortgage insurance, higher interest and monthly payments.
You should also consider the entire financial picture. Apart from the upfront fees required in homeownership, you also need to know how housing can impact your finances. You also need to save for other important things like retirement, the kids’ education, and probably for some luxuries like a vacation. For some people, the impact of homeownership is too much for their current finances, so renting makes sense for them. However, if you put your financial ducks in a row, have saved up for a reasonable down payment and everything is in place, then there’s a good chance that you’re ready to buy your own home.
Do You Have A Career In The Area?
Next question you need to ask: how does your career figure in all these? Does your job offer a career and financial growth so that you can settle in this area for a very long time? Or do you see yourself switching jobs or companies in another location within a short period?
Your job is your primary bread and butter, and it will be the one to pay your bills, including the mortgage, home insurance and maintenance. Ideally, you should feel settled with your career, and you visualize yourself working in the same company or area for the long haul. This means that you’re ready to set down roots there. However, if you’re still figuring out your career path and don’t feel stable at your current job, then renting may be the better option for the meantime.
Are You Handy?
Renting is generally more convenient for people who aren’t very handy around the house. When the pipes leak, the windows are broken, or something needs work, it is automatically the landlord’s responsibility to have these issues fixed.
On the other hand, owning a home means you have to do those things yourself or hire someone to do it, which result in spending time and money having those issues fixed. When you’re a homeowner, you need to learn a few fixing a few things inside the house to some extent. Homeownership typically comes with the hidden and unexpected costs for repairs and maintenance, so if you think you’re not ready for these physically and financially, then you need to rethink your options.
Are You Willing To Make The Investment?
Owning a home is an excellent investment, but it takes a lot to be able to make it profitable. Before you dive into it, you need to determine and be committed to it, because homeownership is a long-term commitment.
At this point, you need to weight your options, especially in the financial aspect carefully. All forms of investments do come with risks, and homeownership is no exception. Renters enjoy the fixed amount they need to shell out for their housing need each month, but homeowners need to dwell on more things. For instance, you might find some months to be more expensive than others especially when it comes to tax time and urgent repairs and maintenance.
Moreover, you also need to go back to Point A: how long are you staying? You have to stay put for at least a couple of years in that home to be able to build enough equity and turn the home into an asset. Also, many homeowners turn their homes into a rental property which would also generate passive income shortly. The thing is, you need to do the math. A house is generally regarded as an asset and investment, but only if you’re willing to make it work.
Are You Throwing Away Money?
Some people feel the urge to buy a home because they’re led to believe that they’re wasting money on rent. They argue that all those months and years you spent on rent would have built equity on a home you own. But this idea isn’t fair or even applicable to all renters.
Let’s clear some concepts first: real estate (such as a home) is popularly known as an excellent investment. However, this is not the universal truth for every individual. In the last few decades, the path has always been to graduate from school – get a job – buy a home – start a family. However, studies also show that retired homeowners also opt to downsize in their golden years and get a rental home or apartment so they wouldn’t have to dwell on repairs and maintenance any longer.
What this shows us is that renting doesn’t necessarily mean you’re throwing money down the drain, especially with what the 2017 NerdWallet Analysis is telling us. According to such study, owning a home is more costly in most parts of the country than renting. For instance, if you are able to save as much $500 a month on housing-related expense, and invest it instead, would render you $169,000 in 16 years (assuming 7% return). Therefore, we cannot generalize that renting is throwing money away, and we also can’t assume that homeownership is an asset and investment, and such statements don’t apply to everyone.
It all boils down to what’s realistic about your finances. If you believe that housing-related expense is too much for you to bear at the moment, then it’s best to postpone it until you’re well-equipped for it financially.
What to Look at When Buying a House
House Prices In The Area
Whether you want to rent or buy, probably your main decision lies in the price of the property or rate of the rental. However, it is not wise to compare monthly rent to monthly mortgage to make an accurate assessment. It is better to compare how the difference between the potential rent vs. mortgage could make a positive impact on your financial well-being.
For instance, if you’re trying to decide between renting a home at a price of $1500 and buying a home that’s $2000, think how the $500 could impact your finances. But note that the comparison when used for similar properties (say comparing a two-bedroom home for rent to a two-bedroom home for sale).
Additionally, you also want to explore the non-monetary sides of the comparison. Some people are willing to pay extra hundred bucks to get a nice yard, while others would save the difference and opt for a multi-unit apartment.
Suffice to say, you want to learn as much as you can about the house prices in the area you’re eyeing to live in, regardless of the decision to rent or buy. You want to know the best price for both, and whether it is well within your budget.
Housing Market History & Trends
Many of us believe that property values are always increasing, but the 2007 real estate market collapse prove us wrong. Fortunately, the housing industry has recovered from that “crisis” and has fared better since then. The annual appreciation rate for property now sits at 3%. This means that a home worth $250,000 today could end up valuing approximately $337,000 in a decade.
With this trend in mind, you would want to be prepared should the housing market suffer a decline or enjoy an increase, or didn’t change at all. It is not wise to rely on housing index to predict how profitable an investment your home is as it focuses on the collective home pricing in an area, not the actual pricing in the local market.
Lastly, you don’t want to consider a home as your main and primary source of investment. Homeownership may seem less risky as an investment, but if you pool most of your funds to it, you could miss other investing opportunities likes stocks and bonds, as well as fail to allocate adequately for other expenses like education, retirement and healthcare.
The Actual Cost Of Buying (And Owning) A Home
Owning a home is more costly than renting in most parts of the country, and renting can seem more manageable on a monthly basis. When you decide to buy a home, you must expect a couple of upfront costs related to being a homeowner. Here are the upfront expenses you need to prepare for when buying your own home:
- Down payment – this is the initial deposit you make for the home. Ideally, you should work out a 20% off the home price as down payment, but you can buy with as little as 3.5%, but that would subject you to a PMI.
- Home Inspection – depending on the area and size of the property, the home inspection could set you off typically from $300-$500.
- Closing costs – this is where you pay all the parties involved in acquiring the property, which includes but not limited to tax lawyers, real estate agents, mortgage brokers etc. However, the expenses don’t stop there. You also need to expect even the unexpected and be well-prepared for them, so you don’t end up being house poor.
- Emergency fund – don’t deplete all your savings to your new home. You could fall sick or lose your job, and you’d be left with nothing, except for the new house. Consider saving at least 3-6 months worth of emergency fund to keep you afloat amidst the unexpected expenses.
- Moving costs – generally, you will need boxes and tapes and then hire a moving contractor when you move from your old home to the newly-purchased one.
- Home and title insurance – you don’t want to skimp on these insurances as they protect and cover you against the unexpected issues that may arise after you’ve settled into your new home. New homeowners typically need to pay a year’s worth of home insurance and provide such proof before the closing the sale. The title insurance, on the other hand, serves to protect you should there be issues and anomalies related to the title of the home. You may purchase this separately or have it rolled into your home financing deal.
- Maintenance and repair – you should have a separate budget for home maintenance and repair because you’ll never fully know the flaws of the home until you’ve lived in it for some time. Unless you’re quite handy around the house, you may need to hire a contractor to fix leaky pipes, repair damaged tiles and beautify your landscape.
Your Income, Savings, & Growth Potential
Purchasing a home is probably the most significant expense you ever make in your life. The costs don’t stop once you’re already moved and settled in. It streams well into the entire time you own the house, right to the point when you’ve finished living in and decided to sell it.
It is therefore essential to consider your income and its growth potential and the amount of savings you have before you decide to buy a home. First of all, income is a vital consideration for financing firms when granting you a mortgage. They’re likely to require a proof of income, and the more desirable your income is, you are in a better position of getting approved for the loan.
Also, credit history is a crucial aspect of getting approved for a mortgage. You want to show a high credit score to obtain better financing rates. And the first step to increasing your credit score is making sure that your income covers all your expenses adequately. If you have too many bills with less income, it’s easy to become delinquent with the payments, resulting in a poor credit score. If you want to purchase a home soon, start working on improving your credit score right away.
Savings is also crucial because you cannot solely rely on the new home to bail you out in times of emergency, especially if you haven’t built enough equity yet. Owning a home gives you access to a home line of equity, but you shouldn’t treat this as savings. You want to have liquid savings that you can use for various financial goals like retirement, college education, home renovations, vacation and others.
It all boils down to being financially-prepared and equipped to buy a home because homeownership is an ongoing, long-term expense.
PROS & CONS
Owning and renting a home both come with each set of pros and cons. Here are the top 3 pros and cons for when you rent or buy a house.
Pros to Owning a Home
- You get your own place. You feel more stable and don’t fear about moving out once your lease is up. Once you’re done paying up the mortgage, the home becomes yours totally.
- You get to set your own rules. You have the privilege to do what you want with your own property without having to ask permission from anyone. You are your own landlord.
- It helps you build wealth. You can turn the home into an investment by building equity. The more equity you have in the home, the more extensive your financing options become.
Cons to Owning a Home
- Homeownership has hidden costs. You never know when you need to pay someone to have a window fixed or the roof repaired. You have no choice but to shoulder these responsibilities.
- It is more costly than renting (upfront) – buying a home is more expensive because you need to prepare a down payment, closing fees and other expenses related to the purchases.
- Makes you feel stable and more restrictive – homeownership makes you feel so stable that moving out becomes harder for you. There are a lot of things you have to deal with should you desire to change location.
Pros to Renting a Home
- It is more affordable on a monthly basis – you know you only need to pay one fixed price for the rent, no hidden charges.
- Moving out is easier – you can basically pack up and move out when you need to without having to deal with selling the home. You get more freedom and flexibility.
- You don’t have to deal with repairs and maintenance – it is the landlord’s responsibility to perform the repairs and maintenance.
Cons to Renting a Home
- It is more restrictive, creatively-speaking – you cannot make any permanent cosmetic changes to the rental home. If you don’t like the paint color, you just have to deal with it. You’re bound by the terms and conditions set by the landlord.
- You’re unable to build equity – all those rent money you spent won’t make the house yours.
- You have to deal with the lease and relocate when the landlord.
Which is the Best?
When you’re trying to decide between renting and buying, you have to know that there is no universal answer. It all depends on your current financial standing, what your financial goals are and which one – renting or buying –makes a positive impact on your life. While financial considerations take the more substantial part of your decision, you also need to understand that getting the best housing set-up for you involves everything; it is a physical, emotional and mental decision. What’s best for one person is not always the best for you and vice versa, so take your time and weigh your options carefully before you make a decision.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.