How to Decide Whether Renting or Buying Is Right for You
You’ve been renting for years and saving up your money, and now you’re ready to think about buying a home. But is buying really better than renting? It depends. If you’re planning to settle for several years, buying could be worth it. If there’s a chance you’ll find a new job in another state, if you’re not sure owning a home is your best investment, if you’d rather outsource your home maintenance or if you live in a costly area, renting might still be the best option.
Don’t Make the Move Just Because You’ve Banked a Down Payment
The New York Times has an excellent calculator that’s a good starting point as you analyze your situation and compare the costs of renting and buying. It includes hidden costs like insurance, appraisal fees, taxes, opportunity costs, and more. As the calculator illustrates, home price and mortgage vs. rent payments are aren’t the only financial factors you need to consider.
Here are a few more pros and cons to consider as you evaluate whether renting or buying is right for you:
Pros of Renting
- When something is broken, you don’t have to fix it. In an apartment, the building management handles repairs and remodeling. From leaky faucets to replastering walls, all you have to do is call your landlord. Not handling your own repairs saves you both time and money.
- Renting gives you more freedom. Say you get a fabulous job offer in another state and you want to move, but you can’t sell your house. Renters don’t have that problem. Maybe you want to downsize so you can take a lower-paying dream job, or you want to live in a more urban area. Selling your home can be a long, stressful process—but if you’re renting, all you have to do is sign a new lease.
- The real estate market doesn’t affect you. Renters aren’t hurt by short-term dips in the real estate market, and they don’t have to worry about whether their home is a good investment when deciding where to live.
- Renters are mortgage-free. Yes, mortgages build equity over time, but they don’t necessarily bring you financial gains. If the real estate market tanks, or home values in your area go down, you could be at a financial loss if you decide to sell. Renters don’t risk having their largest asset depreciate.
- Renters have more freedom to invest. Because renters aren’t sinking most of their money into a home, they can use that extra cash to invest in the stock market, their education, starting a business or anything else, which can sometimes have much bigger payoffs.
Cons of Renting
- It’s never really yours. You could live in the same apartment for years and grow to love it like your own home, but unless you own it, you don’t have that security. You may have restrictions on painting and decorating, the inability to plant a garden or have guests stay long-term, and there’s always a chance your landlord could change or sell the property and you would have to move.
- You miss out on federal tax benefits. Renters don’t get to deduct their mortgage or property taxes, and they don’t get to take advantage of federal tax credits.
- Renters don’t build equity. Rent payments go to a landlord, who owns the building. Renters aren’t putting their money anywhere that it could grow. For homeowners, each mortgage payment is an investment in owning a piece of real estate.
- There are daily annoyances and some hidden costs. Coin-operated laundry can add up, and having to run small changes past your landlord can be frustrating. A nonresponsive or uncommunicative landlord can delay the repair of small problems for longer than you’d like.
- Price hikes happen. Renters don’t have stability when it comes to rent prices. Homeowners know their mortgage payment will stay the same no matter what happens in the housing market, while renters know that landlords could hike the prices each year, at any time, for any reason.
Pros of Buying
- Paying a mortgage builds equity. Buying a home can be costly, but every dollar is an investment in something you will eventually own. Any home improvements you make can further increase your home’s value, helping to bring your net worth even higher.
- Ownership has tax benefits. Homeowners are eligible for federal tax credits and can also deduct property taxes when filing federal income taxes.
- Homeowners are free to personalize. If you own a home, it’s yours to do with as you please, whether that means painting, knocking down walls or changing your landscape. Through decorating and remodeling, you can create your perfect dream home, without having to win over a landlord or make compromises.
- Pets aren’t a problem. Many apartments don’t allow pets, and even if they do, they’re often not the most friendly spaces for dogs or other animals. If you own your home, you can provide a comfortable environment for whatever type of furry (or scaly, or water-dwelling) friend you like.
- There’s potential for rental income. Homeowners can rent out rooms or their entire home through services Airbnb, HomeAway, VRBO or via word of mouth. Short and long-term rentals are great ways to make some extra money and help pay off a mortgage, especially if you travel often.
Cons of Buying
- You own it. Yes, the hallmark of owning a home could also be its biggest con. Once you own it, you’re stuck with it, at least until you can sell. If you need to switch locations for work, if you lose your job, if you need more space for a growing family or if there are massive repairs needed, you’re stuck with the house. Depending on the situation, ownership can become a financial burden.
- Maintenance and repairs are your problem. No more calling your landlord when something doesn’t work: now it’s up to you to either DIY fix it or call the plumber, electrician or other specialist. Repairs take time and often carry a big price tag.
- You’re on the hook for any hidden costs. Buying a home isn’t just about a monthly mortgage payment. There are also appraisal fees, broker fees, insurance, inspections, a down payment and more. This post from Money Crashers breaks down the upfront, recurring and special costs of buying a home. All of these costs may be worth it if you love your home and plan to stay in it for years. But if you expect to buy and sell again soon, these extra costs will add up fast. Factor them into your monthly costs and how much your home will appreciate in the years until you plan to move.
- Don’t forget property taxes. According to Bankrate, first-time home buyers are often shocked at how high their property taxes are. Make sure to research tax rates in the area before buying, and remember that renters don’t pay these fees. If the neighborhood you love has a high property tax rate, renting might be a better deal.
- Buying is more expensive upfront. Renters pay little to nothing upfront, while most homeowners pay 5.5% of the home’s value or more before they even move in.
If after you’ve weighed the pros and cons and decided that buying is the right choice for you, we can help. Contact Anselmo, Lindberg and Associates’ practiced real estate attorneys to start the process right.