The biggest question most individuals face when it comes to looking for a place to live often is not whether a home or apartment is right, but whether they should rent or buy. This is an important decision that can have a tremendous impact on the future of everyone involved; from the financial security of an individual to the sense of stability and community a family might enjoy. If you are looking at homes right now, you might be wrestling with this same conundrum. So, the question is; should you rent or buy?
Renting vs. Buying: Know the Variables
There are several variables that come into play when determining to rent or buy a home. Many people opt to buy a home because it has a greater potential to yield a financial windfall in the future. However, it is difficult to know in advance how much that will be and how much risk, financially and otherwise, may be involved along the way.
Some of the contributing variables to keep in mind, as you start down this decision-making path, are the costs to owning a home compared to rental options. Consider whether or not your family can benefit from tax savings, as well as the amount of time you will spend living in that particular residence.
The Case for Buying
The American Dream was once defined by a singular centerpiece: homeownership. A place that you were invested in, controlled, and earned the right to call your own was vital in achieving the American Dream. However, many factors have combined to change that reality in recent years. What was once a solid investment option, has become, at best, a risky gamble that most still hope will pay off in the long run.
Mortgagecalculator.org has some helpful advantages and relevant concerns about buying a home, which include the following:
- Advantages
o Cost of ownership can sometimes be less than renting
o "Forced" savings by building equity in the home over time
o Tax advantages as a homeowner
o Boost to your credit rating, assuming payments are made on time each month
- Concerns
o Your financial responsibility extends beyond just the mortgage, to include taxes, insurance, maintenance, and repairs
o Less flexibility to move
o Market shifts and price fluctuations can devalue your investment
Generally speaking, buying a home protects you against the often rising, not falling fluctuating rent prices. A traditional mortgage has a fixed rate that does not change over the standard 30-year life span of the loan.
The Case for Renting
With all that said about buying a home, renting is the first choice of more Americans now, since the 1960s. American households across various income levels and generations are renting, at a rate of roughly 37% of all households in the country. While the case for buying a home is often clear, the decision to rent can be muddled by a variety of factors.
Kiplinger points out that there is a price-to-rent ratio that all consumers must keep in mind when searching for a house. If that ratio, expressed as the median sale price of a home divided by the average annual rent for a comparable one, is less than 15, the market favors buyers. Ratios over 20, the market favor renters.
Cities such as New York, San Francisco, and Washington DC often favor renters because homes are more expensive to rent. However, any dip in interest rates can swing that scale in favor of buyers. When trying to decide, keep the following advantages and concerns in mind regarding renting:
- Advantages
o Initial costs are lower
o Limited responsibility for repairs
o Less tax impact and fewer additional costs associated with a residence
o Cost to move in and out is lower
- Concerns
o Know what you can and cannot do in your unit per the lease agreement. Violations can be costly
o Protect your security deposit or lose it (do a walk-through before moving in)
o Make sure you carry renter's insurance
Studies have found that individuals who invest a down payment amount that would have gone toward buying a home, when renting, can come out ahead financially in the short term. However, this requires actually saving that money rather than viewing it as more disposable income.
Guideposts for Making a Decision
As you go about deciding between renting and buying, keep a long-term view of the world. If you are not going to reside somewhere for a long period of time, renting may be the advantageous way to go. If you are going to buy, do the math to figure out how long it would take to break even on your investment. For comparison's sake, look at the return if you invested that 20% down payment in the market, as well as other savings by renting, to determine if it is worthwhile to buy.
Last but not least, consider the initial costs. Both renting and buying come with initial costs, but in many cases those are greater for buying: down payment, closing fees, property taxes, and homeowner's insurance, than for renting: security deposit, monthly rent, and renter’s insurance.
If you have any questions, contact Manhattan Ridge.