The decision of where you are going to live isn’t one many people take lightly. It’s usually both a big financial and emotional commitment. Since it is such a huge decision, most people want to make sure they make the right choice.
Before you even going though the process of finding a house, you have to make a bigger decision. Should you rent or should you buy? On the surface it seems that the right decision should always be to buy. I mean, when you’re renting a house – you’re just throwing money away. Right? If that’s what you’ve always thought then you may be surprised to find that there are cases in which renting is a better choice by far. So what are the advantages and disadvantage of renting a home vs buying?
Advantages of Renting
No Maintenance – This is a huge benefit that a lot of people don’t consider when making the decision to rent or buy. So many people just look at a mortgage payment vs rent. Maintenance can be a significant expense. We have lived in our house for 7 years now. Over the last 7 years, I’ve had to do a full bathroom remodel (because of a shower pan leak that caused some significant damage), replace 2 dishwashers, replace the furnace, spray for termites, replace half of my fence and we need a new roof. That’s well over $10,000 in repairs – not to mention all of the small things that need work from time to time. Maintenance can easily average an extra $100 – $200 per month.
No Yardwork (Maybe) – Depending on where you rent, you may not be responsible for any yard work. If you rent an apartment or a condo this is almost certainly the case. If you rent a home you might still be responsible for basic lawn care. This can also be a negotiable item though. Even if your lease calls for you to mow the lawn, you may be able to work out a deal with your landlord and have him take care of it.
Less Commitment – When renting, you are only committed for the length of your lease. Once your lease is up you can move somewhere else – no strings attached. You don’t have worry about transaction costs. You don’t have to worry about the condition of the market. You just have to find a place that you like better.
Less Cash Needed Up Front – Renting requires you to have much less cash in the bank. You only need enough for your security deposit and the first month’s (and possibly the last month’s) rent. You don’t have to worry about closing costs. You don’t have to worry about a down payment.
Disadvantages of Renting
You’re Not Building Equity – When you move out, all of the money paid towards rent is worth nothing.
You Have a Landlord – Just like having in-laws this could be an advantage or a disadvantage. If you have a bad landlord though, you may end up counting down the days until your lease is up. A bad landlord may take weeks to perform maintenance, make unreasonable demands and be extremely inflexible if you have a special request. And just like your in-laws, his worst side may not come out until after you’ve made the commitment.
You Get Zero Tax Breaks – When you have a mortgage, the interest you pay is tax deductible. There is no such benefit for renting. As far as I know, there are not any tax incentives for renting. First Time Home Buyers Credit – awesome! First Time Renter’s Credit – never heard of it.
Rent Can Go Up – That $800 per month house you found may fit perfectly in your budget right now, but what happens if your landlord decides to raise rent next year? The minimal commitment in renting can be a double edged sword. You only have to agree to pay rent for one year – but your landlord has only agreed on that rental price for that year. He can double the rent next year if he wants to. That puts you in a pinch to find a new place to live in a very short time frame.
You Can Be Forced to Move – Read your lease carefully. It may contain a clause that allows your landlord to evict you if he decides to do a major renovation or sells the property. Even if you aren’t forced to move - the sale of a rental property can be a big headache for renters. Investors will want to see inside – meaning you have to leave when they show the property. The sale of a property can also mean that the landlord you love is replaced by an scumbag slumlord.
Advantages of Buying
Building Equity – One of the great things about home ownership is that every month a portion of your payment is essentially going back into your pocket. The portion of your payment that is applied to the principal is directly benefiting your personal balance sheet. If you have a 15 year mortgage, then a sizeable portion of your payment is going to build your wealth. Your true monthly cost may be a little as 50% of your payment each month.
Asset Appreciation – This benefit ties in with the one above. In general, real estate appreciates over time. There will be ups and downs, but in the long run you can generally expect the value of real estate to increase. When you sell your home – all of that appreciation goes in your pocket.
Tax Advantages – Assuming that you finance the purchase of your home with a conventional mortgage, the interest you pay is tax deductible. All interest and some of the closing costs directly reduces your adjusted gross income – the number on which your income taxes are calculated. The true benefit varies greatly depending on your financial situation, but the benefit can amount to thousands of dollars per year.
Do What You Want To Your House – You own it. There isn’t anyone that can tell you what you can or can’t do to your house (let’s forget about municipal laws and home owners’ associations for now). You don’t have a landlord to stop you from painting the walls lime green and putting a BBQ pit in the middle of the living room. If that’s what you want to do then you can do it.
Your Payment Is Fixed – When you get a fixed rate 15 or 30 year mortgage, you know what your payment will be each and every month for the entire life of the loan. Your mortgage payment will not change. (Now don’t forget about property taxes and insurance – it’s almost guaranteed that these will go up over time. I’m just talking about the principal and interest here. I still consider this an advantage though, because you can bet that if you were renting the property, you landlord will increase rent based on the increased value of the property in addition to covering the increased taxes and insurance.)
Disadvantages of Buying
Cash Needed For Down Payment and Closing Costs – Buying a home isn’t cheap. You have to have enough in the bank to pay closing costs and the down payment. In general, you’re looking at 5% of the purchase price for closing costs plus 5% – 10% down payment at a minimum. For an average home, that could be as much as $20,000.
Have To Be Able to Get Approved For A Mortgage – Unless you have $200,000 sitting in the bank, you’re going to have to find a bank that will lend you the money for the purchase. With the recent credit crisis, banks aren’t as willing to lend as they used to be. You need to have a stable job and a decent credit score to get a mortgage. That means if you have delinquent payments, defaults, a foreclosure or a bankruptcy in your recent past you may have a tough time finding a lender.
Long Term Commitment – Buying a home is a long term commitment. If you have any reason to believe that you won’t stay in the house for at least 5 years then buying isn’t for you. If you have to sell within the first couple of years you may find yourself out thousands of dollars.
Market Fluctuation – When you own a home, you are subject to the ups and downs of the market. There are a lot of homeowners that are underwater right now because the bottom of the market fell out after they purchased a home. Owing $150,000 on a house that’s only worth $100,000 can be a scary place to be.
High Risk If You Lose Your Job – It’s something you have to consider in today’s economy. When you lose your job and you can no longer afford to make your mortgage payment, it’s much more difficult to talk away from a property when you own rather than rent.
Renting vs. buying is a big decision that you shouldn’t take lightly. There isn’t a single answer that is right for everyone. It’s totally dependent on your specific situation.
Do you rent or own your home? What factors did you look at when you made the decision?