We all have to make decisions about where we want to live, but after a few years as a renter, perhaps with roommates or as a dormitory resident in college, it can be a challenge to know whether or not buying a home is the right next step. Most of us have a few factors that make us lean toward renting as well as a few factors that point us toward buying a home. As you make a choice, make sure you are factoring in all of the variables, not just your estimated mortgage payment versus your all-inclusive rental rate.
Here are some ways to holistically compare your options; ask yourself these questions before moving forward with a new rental agreement or signing that pile of mortgage papers.
The Down Payment Versus Deposit Question
In many ways, renting is easier simply because the total cash-on-hand you need to begin a rental agreement tends to be less. A standard rental deposit is often in the neighborhood of one month's rent, and saving up that level of cash doesn't take that long. With a home purchase, however, the expected down payment is typically between 5-20% of the home value, depending on the kind of loan you seek for your mortgage.
5% of even a modest home is enormous compared to most deposits, so one of the first things to consider if you are thinking about renting versus buying is to think about whether you have the cash to make the homebuying leap. If not, another year of renting while investing your savings in some form of savings account or brokerage account may be a smart move.
The Maintenance Question: Time and Money
On the other side, you have to decide how much you will enjoy or resent having to take care of your own property. With rentals, much of the intensive maintenance of the property remains in the hands of your landlord, which means they both pay for the expenses of repairs and take the time to evaluate and fix things. As a homeowner, you will either do the repairs and maintenance yourself or pay someone to do them for you.
Before you compare your payments, start with considering how old your potential home for purchase would be and the kinds of maintenance that would likely be needed. Talk to other homeowners to get a realistic idea of how much they spend to maintain their home and how much time it takes them. This should be factored into your consideration; if you really hate maintenance tasks, it should be factored in a little more heavily, and if you get pride from doing physical tasks, it may be less of a burden.
The Equity Question
So far, the questions make homeownership look pretty grim, but one of the major advantages of purchasing a home is that it is a way to build value. Most properties, even if they don't grow exponentially in value, retain quite a bit of value over time, meaning that your investment in your home is a bit like paying your rent and having some of it go into a savings account. In some cases, prices soar and the entire investment in the home comes back to the owner upon sale; in other cases, they break even and essentially lived in their home for a very inexpensive per-month price. It is also possible to make additions and changes to a property while living in it that boost its value. If you, for instance, have the skills to create a half bathroom in your home, you may boost the value of the home by more than the cost of the materials and labor you've put into the space.
If building equity in a home appeals to you, for instance as a way to leave a legacy for your children or in order to have the peace of mind of an eventually-paid-off property, that can be one of the major advantages of homeownership.
The Insurance and Property Taxes Question
When calculating your per-month comparison, it is important to always consider what you can truly afford: a suggestion from financial experts is to spend 30% or less of your monthly gross income on housing. When comparing rent with your mortgage, you need to add at least two more aspects into the price to make sure it is a fair comparison: what does your property tax cost and what is your home insurance cost, each divided up over the 12 months of the year? Once you have this monthly number, you may also want it to still be lower than your potential 30%, given that you'll want to have some cash-on-hand for repairs and maintenance costs of the home. Many people are surprised that their mortgage will be so little for so much house, compared to local rent, but the expenses can add up, so calculate fully.
The Housing Market Question
Renting usually locks you into a location for a year, meaning that if properties are in high demand, you might be stuck with a high rent for a year. However, if you are in a very high-demand neighborhood while shopping for a house, you may artificially pay a higher price for a home that will eventually plateau at a lower value during the decades you live there. Realtors often consider whether a particular neighborhood is a "buyer's market" or a "seller's market," and if you are considering buying, you want the properties to be going for a reasonable price. On the flip side, a seller's market - when sellers are getting multiple above-asking offers - might be a good time to abandon the homeownership dream and downsize to a rental, reaping the profits of having bought in the past. The market is very important when deciding between buying and renting.
The Question of How Long You Want to Stay
Connected to the question of the housing market is the factor of how long you think you'll stay. Most mortgages are structured so you pay more interest earlier in the mortgage, meaning that you need to stay for 5-7 years to really build some equity in the house. However, the longer you stay, the better your total equity will be, and the more "worthwhile" owning the home will have been. If you are uncertain about who you are living with, like a significant other, or uncertain about a career decision that brought you to this area, there is a chance that you'll want to sell your home before you've really recouped the expense that it takes to get through the mortgage process. There are, of course, reasons to leave a homeownership situation early, but if possible, you can plan to rent if you know that life may necessitate a move in the next couple of years.
The Independence Question
This question is much more abstract than the others. Sometimes, even if renting may, in financial calculations alone, make more sense, people want to buy because of the independence it affords them. Everything from painting the walls to how you landscape the yard may be dictated by a landlord, and not everyone is willing to leave such decisions to someone else. If you have a vision for how your home could look, or if you want to own four dogs who constantly scratch things up, or any of a host of other reasons that could make you want your own freedom, homeownership may be worth it. If it costs a little more in the long-run than renting, that cost has bought you the independence to do what you want on your own land, which can be well worth it if you cannot find a landlord flexible enough to respect your wishes.
The Predictability Question
On the other end of the abstract questions is the biggest benefit of a rental: predictability. Your payments are more predictable in a rental, since one month as a homeowner could contain hundreds or thousands of dollars of repairs, while another month could contain none. You decided ahead of time how much it will cost for the next year, which gives you the ability to plan and make good choices to stay in your budget. Predictability also extends to time, since a homeowner may have to cancel Friday night plans to clean up a flooded basement, while a renter can call the landlord and expect them to handle it themselves. Nothing in life is perfectly predictable, but one of the "services" you pay for as a renter is this predictable life.
Once you've answered these questions for your own situation, you should have a better idea of whether your personal circumstances and preferences lean you toward renting or lean you toward home ownership. What is most important is not to be swayed by a societal preference: if all your peers are renting, that isn't the reason you should rent, and if your parents think you should buy, that doesn't necessarily mean it is right for you. Want more information on rental and housing markets and how to move forward? Contact us today.