The great debate, over the topic of renting versus buying, when it comes to deciding where you will live has been discussed in depth for years. Whether you are reading the latest how-to financial blog or just listening to the wise wisdom of your parents, planning can seem to be a catch-22. Are you jumping into an endless money pit when you purchase a new home? Are you throwing away your money by deciding to rent? These questions have gone back and forth for years, but one thing remains consistent when you enter the debate of renting versus buying-this will be one of the biggest financial decisions of your life.What Are the Advantages and Disadvantages?
If we were to look at the advantages and disadvantages of renting versus buying, nothing can really be set in stone. Maybe that’s why we have never seen a solid answer to this question through the years. It all depends who you are talking to, since some of the points made can be taken either way. Based on your view on life and, in many cases, your personality, what one may see as an advantage, someone else may look at as a disadvantage. In addition, many of the advantages and disadvantages rely heavily on the “what ifs” of life. When it comes to many of the points we will make, we can’t, unfortunately, predict the outcome of the future. So, the price of your house may increase if the market changes or it may decrease if the market drops. There is really no way to tell 100% what the outcome will be.
What do you say we list the differences between buying versus renting and you can, and, along with your financial advisor, you can decide for yourself which option works best for you!
- Are you wasting money? We could look at this question the same way from each side. Homeownership obviously comes with the cost you originally purchase your home for, and additional one-time fees including: closing fees, real estate agent commission, a down payment, and any repairs needed to bring your home up to code. Purchasing a home can come with many additional costs that renters don’t incur. Yearly costs will include:
- Property taxes
- Homeowner’s insurance
- Mortgage payments
- Condo fees, if applicable
Besides yearly costs, you might find yourself paying for the following expenses: trash pickup, water and sewer service, unexpected repairs, pest control, tree trimming, flood insurance in some areas, and earthquake insurance in some areas. While some expenses will be mapped out when you sit down to begin your budget, now that you have made the purchase, some of these expenses will be unexpected and can be costly.
With renting, your money isn’t being invested into anything besides having a roof over your head. Therefore, some people say you throw your money away when you choose to rent.
- Will you know what you are spending? By renting, it seems you are ensuring financial predictability. You know exactly what you are going to spend each month. When you own, you know exactly what you are going to spend each month in mortgage payments, but you might end up with additional expenses that you didn’t expect. For example, your roof might spring a leak during that terrible rain storm and you will need to fix it. Fast! Rent, on the other hand, might increase when your lease expires. So, although neither option gives you predictable stability when it comes to your finances, renting seems to be the lower risk.
- What is more important to you when choosing how to live? One of the most important questions this comes down to is: what are you looking for in a home? Renting gives you flexibility. Are you a wandering, gypsy soul? Does your job require that you move frequently? Are you simply unsure if this is the state or town for you? These questions can be easily solved by choosing to rent. You aren’t locked long term into anything besides the term of your lease you sign into when you initiate your rental. But, ownership is a long-term decision, or at least it should be. While you might move at some point during your life, most people purchase a home for stability. If you want to be a part of a community, long term, where you can raise your children, homeownership will reduce the risk of being uprooted. As renters, your landlord can choose to sell at any time, leaving you looking for a new place to live. So, the question comes down to stability versus flexibility. From family to family the desire to have either one of these varies. So, discuss which option works best for you and move on from there.
Ultimately, the decision to purchase a home or to rent should be discussed with your financial advisor. Renting versus buying is no longer solely a matter of apartment versus house. Many homeowners choose to put their house or condo up for rent. Housing can be a great investment in good times because of leverage. It is predicted that a purchased home gains three percent annually in appreciated value. A three percent increase in the price of your home could equal out to fifteen percent increase on equity. But, this is just a prediction. And, the same applies to a decline. A twenty percent decline in your property can leave you with zero equity, if you put a twenty percent down payment on your home at the time of purchase.
Unlike years ago, where it was advised that you buy a home, at a young age, to get the most out of your investment, more and more people are turning to rentals. They invest their money by purchasing stocks and other investments that can have an average return of 9.8%. But it is important to remember, choosing to rent versus buy is more than a financial decision. Your vision of life, level of comfort, and idea of permanency should all play a role in your choice. For these reasons, it is important to unveil your emotional view, when discussing which decision is best, with your financial planner.