Real estate Q&A: “Should I rent or buy a home?”
The great debate of whether to “rent or buy” will never end, but I’ll do my best to add a little insight on the topic. If you scour the internet looking for answers, you’ll likely come across biased answers from interested parties, namely real estate agents, mortgage brokers, and others who say it’s always a good time to buy.
The thinking there is that home prices are always going to go up in the long term, even if they experience some fluctuation in the short term. This may be true, but that doesn’t mean it’s always a good time to buy, especially if you can get the same house for $50,000 less if you just wait a year.
The question of whether to rent or buy a home is especially pertinent now, with home prices much lower than they were a few year ago and affordability at all time highs. Of course, one of the main reasons things are so affordable is because mortgage rates have been pushed artificially lower by the Fed. Home prices are still quite high, which is why most prospective homebuyers are continuing to wait.
Ok, that’s great to know, but should I rent or buy a home? Fine, fine, let’s look at the pros and cons of each, in case you overlooked some things.
Advantages of Renting
Renting has its advantages, aside from typically being cheaper than renting a home or a condo, it also comes with flexibility. If you need to move for any reason, job relocation, lifestyle change, etc, you can usually pick up and go with short notice. Certain utilities are also paid for by the landlord, and the smaller space may result in lower bills. Upfront costs are also smaller when renting; you don’t need to come with earnest money, closing costs, or a hefty down payment, just a deposit that will be refunded once you move out. Check out the most affordable places to rent.
- No down payment
- Flexibility to move
- Lower monthly payments
- No risk
- Fewer bills
- Fewer headaches
Disadvantages of Renting
And now, the downside to renting. You may find that renting an apartment or a home is still costly, but that money isn’t building towards anything. You’re simply making payments to a landlord who reaps the benefits of owning real estate, while you’ve acquired nothing. There may also be restrictions as to what you can do with your rented digs, such as the desire to fashion renovations. You may also have noisy neighbors who stomp around above you or blast music at all hours of the night. Additionally, the space may not accommodate your growing family or your pets.
- Rent money doesn’t result in ownership
- Noisy neighbors
- Limited to rules set by your landlord
- Space may not be adequate for growing family
- Pets may not be allowed
Advantages of Buying a Home
There are many advantages to buying a home, but they don’t come without risk. The biggest positive to buying a home is probably the notion of real estate as an investment. Who wouldn’t want a buy a property that could rise in value in just a few short years? After all, if your monthly mortgage payment was close to that of a rental payment, why not try to make some money via appreciation? Not only that, but the interest portion of your mortgage payment may be tax deductible, so that payment may not be as high as it looks. Not to mention the flexibility you’ll have to fashion your home as you’d like, the pride of ownership, the lack of rules, and all the space.
- Interest portion of mortgage payments tax deductible
- Real estate taxes deductible
- More space
- Pets allowed
- Your home may increase in value
- Flexibility to modify your home as desired
- Low mortgage rates and down payment requirements
Disadvantages of Buying a Home
Aah, but there are downsides to homeownership as well, darn it. Buying a home can be a tedious process, and requires a lot of money out-of-pocket, especially nowadays. And can you even qualify for a home loan right now with financing so restrictive? What if your home value plummets, as many have in the past year or so? Then what? You may not be able to sell it if the current mortgage amount exceeds the new value. Even if your home retains its value, what if you need to move suddenly? It’s not very easy to sell your home, especially if it’s at an inopportune time. Then there are the repair costs and all the associated problems that come with owning a piece of property versus renting. Remember, you’re on your own, no landlord to save the day.
- Higher out-of-pocket and monthly costs
- Must pay taxes and insurance
- Risk of home price declines
- Time consuming process of buying/selling
- Less flexibility if you need to move
- Higher utility costs, repair costs
- More financial responsibility
So there’s a look at the pros and cons of renting versus buying a home. There are calculators out there that look at the financial aspects, but I wanted to focus on other issues as well. Clearly it’s not a great time to buy, as home prices still look to be heading south and scores of foreclosures and bank owned properties have yet to land on the market.
But over the long term, you’ll likely stand to gain if you buy a property, as historically, home prices have always climbed higher. Just consider these issues before jumping into it, and do your homework to determine whether it makes sense financially.