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Should I Rent or Buy a Home?

Pauline Charlton Real Estate Leave a Comment

Choosing whether to rent or buy a home is not an easy decision. It requires you to carefully examine the factors and costs associated with each option. Which is better? That depends.

Your unique economic situation, lifestyle and goals play the largest part in deciding what is better for you. It’s important to go into your calculations with open eyes. As much as you want a home, you may not be able to afford it. Or it may not be the right decision for the way you like to live.

Factors To Consider When Buying/Renting a Home

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The following four points are the largest factors to consider when weighing the pros and cons of whether to rent or buy.

1) What are the total costs?

Many people look at the economics of home-ownership as a mortgage payment only. In reality there are insurance, repairs, property tax, homeowners association dues etc. that all have to be factored in to your monthly costs. Check out this calculator from the New York Times to see more.

Use a calculator and compare to see if:

  1. The monthly cost as a homeowner is less than renting.
  2. You can afford the monthly cost (if it works out to be less than renting in your area)
  3. Saving a 10-20% down-payment is feasible for you.

If owning a home is definitely the way to go for you, you need to be able to answer the above questions definitively.

2) What is important to you?

Are you more interested in building for the future, or reducing your financial risk until you can figure out a plan? You may want to own if you are thinking about starting a family. But as someone who is single, you may enjoy your freedom and having less financial debt. (Even if it is building your net worth in the long run).

Undoubtedly, buying a house only makes sense if you plan to set up roots. If you plan to move regularly, your transaction costs will likely bring the equity you build in your house to zero. Thus diminishing your upside while carrying all of the liabilities that come along with home ownership. Owning a home is a smart decision if you plan to stay for a while.

3) What is your preferred lifestyle?

Do you want to build a career in a specific city or travel around? Do you have long-term goals in mind? It’s okay if you don’t. The most important part is being aware of where you are. You may want to get some international work experience or try your luck in another part of the country. Or you may not.

Really think about what you want. You could lose some serious money if you buy a house and sell within a short time because you decide it isn’t for you.

4) What are the opportunity costs of renting or buying?

Think about the pros and cons of home-ownership. On one hand, you will always have a home base. On the other, you have a property that ties you down to a geographical location. Can you make more money in another city? With a home, you can’t move to pursue those opportunities unless you rent the existing home to tenants.

If rent is equal to monthly payments as an owner, think about the opportunity costs of having all of your money tied up in the house. For example, some investors may rent and opt to invest their money in the stock-market or other investments in their portfolio. Can you make higher percentage returns yearly with the money you would be using for a down payment?

Renting vs Buying

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The above were things you will want to consider. If you need to be realistic to make the right decision about renting vs owning a home. The  two situations discussed below may help if you aren’t able to come to a conclusion.

When is Renting a Home Better than Buying?

Despite popular belief, owning a home is not always the best decision. Lets not be dogmatic. It depends on your particular situation.

You may want to rent if:

  1. You want to travel and set-up shop in different places every few years.
  2. You do not have the job or financial security to (realistically) guarantee payments for years to come.
  3. You have demonstrated the ability to make better financial returns through other investments.

There are other factors. However, this is a good starting point to help you determine your argument for renting versus owning a home. The benefits of renting are not being tied down to a geographic location and being able to leave when your lease runs out.

When is Owning a Home Better?

If you are a renter you probably have a lower net worth than a homeowner does. That is because the homeowners  benefit from the equity built up from (a)  increase in value and (b) payments applied to the mortgage principle that increase your ownership equity in the asset (the house). There is also the added benefit of the tax deduction: you can write off the interest paid on your mortgage. Furthermore, with a fixed mortgage, the payments on principle stay the same over the life of the mortgage.

Renters do not enjoy these benefits. When renters become homeowners, however, their rent becomes the mortgage payment which helps them improve their net worth.

So if your rent payment is larger than a mortgage payment would be or  if your rent keeps increasing,  its time to decide if you can afford to take on the responsibility of owning your home.

You may want own if:

  1. You are okay with staying in one place for a while.
  2. You have the financial stability to afford the home (and float payments if you lose your job).
  3. You want to leverage your home as an investment property down the line (through rental).

Owning a home gives you an anchor. It helps you stay grounded by having a home base. At the same time, you may increase your financial  situation by leveraging the home as an investment property later on. 

In Conclusion

Choosing to rent or buy your home is a big decision. It depends on your individual situation and your vision for the future. In short, owning is traditionally the better long-term strategy. However, that’s not to say that you can’t do as well or better with the right investment portfolio.

Keep in mind, that homeowners have a greater net worth than do renters. 

You still need to weigh the pros and cons very carefully. Before jumping into anything, analyze your financial situation. Think hard about where you are and where you want to be for the future.

Speak to a Realtor® and see if they have any advice for your individual situation.

If you are looking at purchasing property in the Metro Nashville area, give me a call. I’d love to discuss your options and see if buying is the right path for you.

About the Author
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Pauline Charlton

Pauline has been a Realtor since 2004. She loves helping her clients to find the homes that meet their needs. Having lived in the area since 1986, she has intimate knowledge of her service area. The best interests of her clients motivate her to negotiate the best deal for them. Her goal is to meet and exceed your expectations.