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Buying vs. Renting: Consider the Facts Before You Decide

Buying vs. Renting Facts

At some point, everyone reaches the place where they have to make one of life’s big decisions: should I rent or should I buy?

The answer depends a lot on where you are in life, both personally and financially.

Home buying is part of the America Dream. It can be one of the wisest financial decisions you make, building equity in real estate. But as with some many things in life, timing is the key.

Most people who get their first place are renting, so let’s look at the benefits of ownership.

Why You Want to Buy

Home ownership has some advantages, including the following.

Building equity. If you rent you are not buying anything. If you own you are building equity in an investment over time. You can’t do the same thing as a renter, unless you are disciplined enough to set aside extra cash every month for investment.

Tax exemption. Home ownership allows you to take a tax exemption for the amount you pay in interest on your home loan. This can be quite a bit, especially at the beginning of the loan.

Appreciation. Many people have been scared off home ownership because of the housing bubble that burst in the first decade of the 21st century, but historically over time most house prices increase. This obviously is a huge plus for home ownership. However, it’s important to disregard any national figures on home appreciation and look at your local market – every market is different.

Low interest rates. Interest rates continue to be at a historic low, meaning that it’s possible to buy more house than you think you can (it’s typical for people to think they can’t afford to buy, when actually they can).

Buying vs. Renting Factors to Consider Before Buying

Even with the advantages of buying, there are reasons to keep renting at certain points in life or if certain conditions aren’t met. Here are some factors to consider.

Your future plans. If you have the sort of job that requires you to relocate – or if you are planning on moving for reasons of your own – than renting is likely the better choice. The upfront costs of buying a home, including a down payment, insurance and initial costs to maintain your home, take a few years to earn back in most cases.

Interest up front. As part of the above, it’s also good to keep in mind that most of your payments in the first few years of home ownership go to interest, so you will need to stay in the home for at least a few years to start building equity. This of course does not apply in areas where home values are appreciating rapidly.

Rental costs in your area. Before buying, check the rental costs in your area. Would it be cheaper to rent and sock away extra cash in investments and savings? Also, if you had to move, would you be able to cover the mortgage on your house by renting out your home?

Transitionary times. Noted financial expert Dave Ramsey advises his audience to rent for a couple of years after a time of transition, including graduation, marriage or moving to a new city. It’s best to give yourself time to adjust to the change and figure out what you want and also what you can afford.

That second part – figuring out what you can afford – is very important whether you rent or buy. Too many people end up spending more than their monthly income allows, which gets them under the financial waters rather quickly. That’s not a good step toward financial freedom, but rather, financial ruin.

Play it smart, instead. Take time to carefully consider not only where you are now in your financial and personal life, but where you expect to be in five years. That way, whether you rent or buy, you will be in sound shape financially.

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