Faceoff: Buy versus Rent
Last week, we said goodbye to our neighbors of 7 years.
It was particularly sad given that they didn’t want to leave, but the owner of the property, their landlord, had decided that they wanted to move back in and so my neighbors were given their 30 day notice.
What followed was a hastened and expedited attempt to find a suitable and comparable home and the logistics that no one wants to consider so close to the holidays.
So this seems like a good time to talk about what is always on every renters mind. Is it better to rent or to buy a home and what are the considerations?
First, there are certain questions that short circuit any benefits to buying and make this an easy decision to stay renting.
Do you have a downpayment?
If you don’t have a down payment, it is a bit more difficult, but these days, if you have good credit, then it is possible to get into a house with only a 3% down or even less if you get creative.
So while not having a down payment is not a complete dealbreaker, it does present some challenges and it is not wise to jump into ownership without a cushion and a safety net.
Is flexibility required for you or due to your employment?
If you anticipate needing to make a significant move in the next few years, then you probably shouldn’ t buy. It is simple, the costs to close and then to resell your home will eat into any savings you could have from buying and owning home.
If you have uncertainty, then monitoring your situation while renting is smart.
Reasons to rent:
- Flexibility.Renting allows you to explore an area before making the longer-term commitment to homeownership. Unless you are certain about a specific neighborhood, renting allows time for research and discovery.
- Career uncertainty. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent. Buying ties you down to a greater extent.
- Income uncertainty. If you expect a pay hike or cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
- Bad credit. Creating a history of on-time rental payments can help you build the sort of credit you'll need to qualify for a mortgage.
- No maintenance expenses. When a pipe leaks, you don't head to the store; you head for the telephone and call the landlord.
- Utilities (sometimes) included. In some instances, the landlord may pay for many utilities such as water, sewer, garbage, and, in some cases, even heat and hot water.
But there is a downside, too: You may have no control over the fluctuation of your rent, a big-budget item that can change often. Long-term budgeting becomes more difficult.
Buying for long term wealth creation.
For people that are planning on staying put for the foreseeable future, the decision becomes a little less clear. Generally, while it will be more expensive out of the gate, owning a home can become more economically advantageous in just 3 years after purchasing a home.
If you look at the chart below, you will see that due to a fixed payment that never changes versus a rental payment that can increase 3-5% a year, the advantages to owning becomes more pronounced over time.
As a living real-life example that emphasizes this point - I bought my home in Huntington Beach in 2002.
Now, 13 years later, my mortgage payment, taxes and insurance is LESS than what my neighbors were paying to rent an almost identical house next door.
Not only are my payments cheaper than renting, I also receive a tax deduction for the interest I am paying, making it an even better move.
This chart shows that as rents increase, the tax deductibility combine with fixed payments produce savings that increase over time.
Forced to Save for the Long Term
Financially, having a home makes you more disciplined and makes you save. When you send in your mortgage payment each month, you pay interest AND principle.
What this does is essentially force you to bank some of your hard earned money each month in your home. If you keep this up for 30 years, you will own your home free and clear and have access to the product of your diligent, albeit forced, saving.
Along the way, as your home appreciates and your loan amount decreases, you have the opportunity to use this equity by getting a Home Equity Line of Credit (HELOC).
Other Reasons to buy:
- Equity. When you pay rent, you are paying your landlord's mortgage or adding equity to his or her bank account. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment. A general rule is that if you intend to stay in your property for at least five to seven years, the costs of purchasing the home are more likely to be offset by accrued equity and increased housing value. In the event that equity in the home grows to more than a 20-to-80 percent loan-to-value ratio, you will be able to borrow against your equity in the home. This can be cautiously used should you need capital to pay for major purchases. If interest rates drop, you can refinance your mortgage at more favorable rates, or, once you've paid the entire mortgage off, borrow against the equity in your home to fund major purchases such as a second home or your child's education.
- Tax deductions. You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. Not only that, but if you meet certain requirements the IRS won't apply a "capital gains" tax on your profits from the sale of your home. You can keep the first $250,000 in profit you make when selling the home if you're single, or the first $500,000 if married. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.
- Creative control. You like dozens of pictures on the wall? Well, hammer away -- they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
- Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners' association, you may pay a monthly fee to have maintenance work covered by the association's contractors.
Buying a home is usually cheaper in the long run than renting, but then what makes some still hesitate to purchase? The answer is usually fear of the unknown and not knowing where to start the process.
No matter what the hesitation maybe, you will still need a place to live, a home to raise your children, and a place you would truly want to call “Home Sweet Home”. The first step may seem the hardest but I love my job and we strive to actually make the first step the easiest.
Please give us a call - we would love to introduce you to the idea of buying a home and help you create a personal plan that won’t modify your life too greatly, but will be worth it in the long run.