We’ve all heard the sentiment that you may as well be throwing money away if you’re renting a home, but is that really the case? The answer is that it depends on your specific situation: your needs, finances, and future plans! Home ownership can be beneficial under the right circumstances, but it’s not all sunshine and white-picket fences and while renting may be convenient, you are at the whim of a landlord. There are upsides and downsides to both options and you may find one appealing over the other at different stages in life. We’ll help you explore the factors to consider before deciding whether to rent or buy!
The biggest pro for renting is flexibility should your life circumstances be uncertain. Not committing to an asset that cannot easily be liquidated allows you to more freely make decisions without being tied to one location. While there might be a cost to breaking a lease, it’s typically not prohibitive and can be done quickly. In general, renting is typically less expensive than purchasing a home. Likely the most you’ll need to pay up front is a security deposit, first month’s rent, and, potentially, last month’s rent. It may sound like a lot to pay right off the bat, but it’s almost always cheaper than the costs associated with closing on a home. In addition, you don’t have to pay maintenance expenses or property taxes. If anything breaks or goes wrong with your rental property, the landlord is responsible for fixing it and covering the cost of any repairs. If the landlord raises your rent too much, you can choose not to renew your lease and live somewhere else.
Now for the cons to renting. Your landlord could increase your rent at every lease renewal and, if it’s not what you want to pay, you’ll need to find somewhere else to live. Also you’re not building equity since you don’t own the home, so your rent payments go into your landlord’s pocket rather than towards your future nest egg. On this note, if you want to make any changes to the property, you’ll have to get your landlord’s permission before modifying anything. Permission can also be required beyond alterations, as your landlord may have the final say regarding your getting a new pet or having another person move in.
What is often considered to be the most exciting benefit when it comes to buying a home is that it’s all yours! You can customize and remodel it how you like; it’s your space to paint, design, and decorate to fit your own taste. Another pro is that with a fixed-rate mortgage, your payments and interest will be stable until you pay the home off. After interest, everything you pay towards your mortgage is saved for you in the form of equity, which could be compared to a future savings account of sorts. People use equity as collateral to secure home equity loans that can be used to fund home repairs, cover large expenses, or consolidate debt. If you sell your home and real estate prices have remained stable or increased, you’ll get most of the equity back as cash that you can then use towards a new home. A downside of home ownership is that it is expensive right out of the gate. You’ll need to be able to cover a down payment and closings costs to purchase a home. Tax laws can change resulting in higher annual property taxes or fewer tax deduction benefits. There is also the possibility of your home value decreasing, meaning you could owe more on your mortgage than your home is actually worth.
- Finances and the cost of ownership
Perhaps the biggest question when it comes to buying a home is, can you afford it? You will typically need to pay 10-20% of the home’s purchase price in cash upfront and account for another 5% in closing and moving costs. Then you’ll need to factor in homeowner’s insurance, property taxes and have funds set aside for annual maintenance costs.
Additionally, your neighborhood might have a Homeowner’s Association (HOA) with regular dues. Depending on the real estate market where you live, it could be quite expensive to buy a home and renting may be more prudent depending on your individual financial situation, regular expenses, and short and long-term financial goals. However, if you live in an area where homes are pricey, it is likely that rents are also on the higher end and research shows that after a few years of home ownership, it is usually cheaper to own than rent.
- Future plans
On the note of living in your home for a few years before costs balance out, you’ll only want to buy if you plan to live in the home for at least 3-5 years. This is due to various financial and personal reasons. The costs of buying a home normally will not make sense if you are planning to live there short-term or if you anticipate needing to move out of the area soon after occupying the home. It can also be stressful and time consuming to go through the process of purchasing a house, settling in and making it feel like your own, only to have to sell shortly thereafter. There is always the possibility that your home will not sell quickly and so you may need to wait to time the market or make renovations and upgrades to improve your prospects for receiving an acceptable offer, so it is best to plan to be in the home for several years before selling. Houses can be a great avenue to build your net worth and give your financial outlook a boost but, like all things in life, it is not guaranteed. It’s important to keep in mind that homes can decrease in value and not appreciate as anticipated too.
As you can see, there are upsides and downsides to renting or buying a home, so you’ll need to thoroughly think through your options and make the best decision for you. It’s always wise to consult with professionals like CERTIFIED FINANCIAL PLANNERS™ or Certified Public Accountants to be sure you’re considering potential risks related to either choice. They can help you better understand how renting vs. owning could affect your cash flow, long-term goals, tax liability, and more.