Section 1: Owning vs Renting

Most people begin their independent lives renting, maximizing lifestyle flexibility and minimizing the upfront costs associated with purchasing a home.  As careers are built, money is saved and families are started, many choose to buy a home.  The change in needs may be better filled by a single-family home, condominium, townhouse, or duplex.

At some point in life, everyone will consider if it is better to rent or buy a home.  Each have advantages, but what is better for you depends on your circumstances.  Here are some questions to ask yourself:

How long will you stay in the home?

Each market is different, but generally it takes four to seven years to break even on a home.  If you are thinking of buying and selling in two years, it is very unlikely that buying will be cheaper than renting.

Do you think of or need your house as an investment in your retirement plan?

Americans are used to their homes being a store for wealth they can liquidate in retirement as part of downsizing their lifestyle.  A note of caution, generally homes appreciate over time, but external factors can cause a house to lose value.

Are you financially ready?

Owning a home is a financial commitment that requires planning.  Knowing and following your budget will prevent you from stretching your finances.  A frequent mistake of first-time homebuyers is comparing a month's rent to a month's mortgage payment.  There are additional costs necessary to include to make a fair comparison: principal, interest, property taxes, property insurance, homeowners' association fees, and maintenance.

Are you prepared for the down payment?

This is the lump sum payment that funds your equity in the house.  Down payments vary, there are some loans that allow down payments as low as 3%.  Some loans allow relatives to contribute to the down payment via gift money.

Are you emotionally ready?

A big factor to consider when buying a home is stress.  If you have recently made other life changes such as marriage, switching careers, or having a child, it might be wise to postpone buying a home.  It is better to rent if your life is in flux and buy when your stress levels are lower.

Are you ready for commitment?

Are you ready to make a lot of decisions?  Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate and that will serve your needs?  Are you ready to devote the time and attention to maintain and repair a house?  Taking care of your investment can be gratifying, but only if you are prepared.

Advantages Of Owning:

Control over housing expense

By selecting a fixed-rate mortgage, you have assurance that the housing costs will not increase over the period, and will be eliminated at the end of the term.

You build equity

Every dollar put toward your loan's principal represents a dollar of equity.  On average, homes apprciate three to five percent a year, increasing your equity.

Improvements increase your home's value

Improvements that you make to your home increase comfortability, enjoyability, and value.

Ownership rights and creative freedom

Your decorating and home improvement choices are yours provided you do not break building codes or HOA rules.  Changing your environment to suit your whims is a freeing aspect of homeownership.

A sense of belonging to a community

Homeowners tend to stay in homes for longer than renters and are more likely to grow roots.  They might join neighborhood groups, volunteer at community centers or join a school group.

Advantages Of Renting:

No responsibility for maintenance

As a renter, you are not responsible for home maintenance or repair costs.  If an appliance in the house breaks, you call the landlord and not an expensive repair person.

Relocating is easier

It is much easier for you to relocate for work or some other life change when you rent.  It may cost you some money to break a lease, but you do not wait until your house sells.

No real estate market exposure

Home value fluctuations do not impact you as a renter.

Disadvantages Of Owning:

Maintenance

While insurance protects you against major catastrophes, everyday maintenance items are on you.  Maintenance items can be minor repairs or large expenses such as replacing the HVAC system.  It is good practice to save a little money each month as an emergency fund for maintenance items.

Upfront and closing costs

There are a variety of upfront costs when purchasing a home.  In addition to the down payment, there is also closing costs, home inspection, home appraisal, property taxes and homeowner's insurance.

Loss of relocation flexibility

It is easier to break a lease to move than it is to sell a house if you need to relocate.

Financial loss potential

Generally, home values increase three to five percent on average each year.  There is a possibility of market fluctuation though.  If the market does take a downturn, and you have to sell because of a life event, you may find yourself in a position of selling at a loss.

Disadvantages Of Renting:

No equity

The monthly rent that you pay goes to the landlord.  You gain no ownership in the property regardless of how long you live there.

Home improvements go to the landlord

Any improvements that you make to the property while you live there belong to the building owner and will stay behind when you move.

© 2021 by Jim Shorkey