Should I Rent or Buy
There are a lot of variables to consider when you ask the question should I rent or buy. Some of this comes down to personal choices, where you are in life, what are your future plans, how long will you stay in a property, etc. The answer isn’t an easy one to answer.
If you have already considered all the pros and cons and are still undecided you can use the rent vs. buy calculator to answer the question strictly based on a financial basis.
In the past the answer would be buy as soon as you can because it is a great investment. The last real estate bubble in 2006 – 2008 turned that answer on its head. We saw people walking away from properties, foreclosure through the roof, not to mention credit and lives destroyed along with the crash of financial markets.
There are scenarios when it makes sense to rent instead of buying. Some of them include moving to a new location, renting until you become familiar with the area, this allow you to casually look while you lease. Moving out of your parent’s house, it is easier to rent than to buy, it requires less commitment, and upfront expenses.
So, excluding the recent market crash is real estate a good investment? Well, historically since 1975, housing has appreciated by an average of 4.5 percent per year. Stocks on the other hand have returned 8-10% including dividends on average. Remember that the 4.5% increase is on the market value of the property not on what you have invested in the property. Leverage can make this a larger return. Example 10,000 down on a 100,000 property become 45% return on your investment.
If you rent you are less likely to make improvements, since it is not your property. Your landlord will pick up the taxes, insurance, repairs and sometimes utilities. However if you own, you will be shelling money out for repairs and you may make improvement that may be costly (i.e. new kitchen). The improvement may be recouped when you sell the property. You will also paying the property taxes and insurance.
Interest on home mortgages is deductible, which sounds good but remember that you are have paid interest to the banks, property taxes, closing costs to be entitled to this benefit if you can consider it one.
Most people thinking about buying compare monthly payments to rent, which is a good starting point. Paying a mortgage every month some of the payment will go toward principle. The principle can be considered like saving.
When buying you will need to consider how long you will be living in the property. Transaction costs can be considerable in housing. Real estate agents generally charge six percent commission on sales, which will make moving expensive. This may make renting more attractive vs. buying unless you are confident you want to stay in the house for several years, preferably even longer.
As a renter you need to remember that you do not control your housing destiny. If the landlord decides to sell the property, or worse has not been paying the mortgage, you’ll be looking for a new place to live, unexpectedly. The landlord can also raise the rent at the end of the lease. The may not be diligent about maintaining the property or take forever to perform repairs.
One of the benefits of owning a house you have control to make your own decisions (subject to neighborhood rules, of course). If you want to change the paint color or replace the carpets with tile, your choice. With flexibility come responsibility, some things are out of your control. The plumbing breaks or the roof starts leaking for example. Keep in mind expenses will come up and it is your responsibility to handle them.
To help make your decision easier, write down your reasons for buying and renting (i.e. pros and cons of each). Use the rent vs. buy calculator, talk to friends and family and ultimately follow your heart it is a big decision.