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Renting vs Buying
“If you rent, you’re throwing away your money.”
“Owning your own home is a forced savings plan.”
“Home ownership is an excellent path to build wealth.”
You’ve probably heard statements like these plenty of times; on television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It’s common knowledge that buying a home is a better financial move than renting. After all, you’re building equity instead of throwing away your money, right?
Rather than assuming the “common knowledge” on this subject is accurate, let’s take a look for ourselves at some of the differences between renting and buying.
Renting
Advantages
- More fixed costs for the term of the lease
- Not gaining equity, but not losing it either
- When the lease is up, you can just move
- There is generally less work in maintaining a home or apartment
- Smaller amount of "up-front" cash
Disadvantages
- No matter what happens with the value of the home, you will never gain equity
- Limited--or no--ability to personalize your living quarters
- No tax advantage to renting. Your landlord gets any and all tax breaks that are available
Home ownership builds wealth in two ways: through the forced savings of paying down a mortgage, and through appreciation -- the rise in the home’s value over time.
The earlier you get in the game, the quicker you can get that appreciation working for you. The longer you wait well, the consequences can be stiff.
The longer you rent, the less likely you are to buy. You fall further and further behind. In most cases the market is appreciating faster than you can save a larger down payment for a home, therefore your potential mortgage payments keep climbing.
Still, even buying a home isn’t always the best choice. Sometimes you’re smarter to hold off and rent, postponing the day when you graduate to the ranks of homeowner.
But how do you decide if you’re being prudent or chicken?
4 keys to profitable home ownership
You’re most likely to win by owning, rather than renting, if the following are true:
You plan to stay put at least three years and preferably more. In most markets, it can take three to six years for a home to appreciate enough to offset the costs of selling and moving. Anyone who won’t be moving in the next year should roll the dice and buy; I’m a little more cautious, particularly in overheated markets where you may need to stay put even longer than five years to ride out a real downturn.
You’re psychologically prepared. Home ownership means dealing with whatever comes up -- from noisy neighbours to clogged plumbing. You can’t just call the landlord for help or pack up and move as easily as when you were renting.
You have some extra savings. Home buyers who spend every dime they have buying a house inevitably are blindsided by repairs, maintenance and all the other costs of owning a home. Then they go into debt trying to keep up their current lifestyle. Smart home buyers make sure they have an amount in savings at least equal to two mortgage payments after the deal closes, and preferably much more.
You manage your money pretty well. That forced savings aspect I discussed above works only if you can keep your hands out of the cookie jar. Otherwise, it’s too easy to drain away your wealth with home equity loans and lines of credit. If you’re the kind of person who lives on credit cards and doesn’t know where the money goes, you’d be smart to clean up your financial act long before you go hunting for a house.
So what is the best decision for you? Take into consideration all the facts above and be sure to make your next move cautiously. You can never be too informed and educated when it comes to making the largest purchase you will ever make.
Follow this link to see how your payments would look and weather buying is more profitable than renting.
Buying
Disadvantages
- Variable costs
- Equity may go up, down, or stay stagnant
- If you want to move, home generally must be sold
- Work needs to be done by you--or paid for by you
- Generally a larger initial investment--the down payment
Advantages
- Over time, the mortgage balance decreases and equity builds, even if the value of the home does not increase
- The ability to remodel and redecorate the home to match your needs and desires
- There can be tax advantages attached to home ownership. Consult competent legal and/or accounting advice for details for your situation
The Residential Group Realty
