.

Buying vs. Renting - What you should know

This blog post talks about the pros and cons of buying a home vs. renting one

Don't let the thought of buying a home scare you into continuing to play the renting game. While renting may be a good option for some, it is usually temporary and does not allow you the benefit of financial investment. 

A home purchase allows for a nice pay-off when you decide to sell your home down the road. Over the years of home ownership, you will be paying more in principal and less in interest, and therefore building more equity in your property. 

In addition, owning your home gives you the flexibility of changing the decor or landscaping, remodeling or creating additions, and more. Renters have very little input in the aesthetics of the home because they must get approval on most changes they would like to make. While you are responsible for maintenance when owning your home, you are not dependent on a landlord to maintain the property for you based on his schedule and decisions regarding the improvement, repair, or maintenance. Renting requires little to no responsibility for maintenance, but it also does not allow you the benefit of real estate tax write-offs, and you have no control over rent increases or the possibility of eviction. 

As a real estate agent, I am partial to home buying, but I want to explain one of the few circumstances when renting may possibly be a better option. It makes good financial sense for a home buyer to plan to stay in his/her home for 5 years. Less time than that, and the closing costs and payments may make home buying a less desirable choice from a financial standpoint. This is most often the case when one is transferred to a new city where the possibility of the new job being temporary is greater. In this case, it may be wise to rent for a short time in order to determine the length of your stay in the new city. To better explain this circumstance, here is a chart on Fannie Mae's website. It shows a cost comparison for a renter and homeowner over a seven year period.

  • The renter starts out paying $800 per month with annual increases of 5%
  • The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
  • After 6 years, the homeowner's payment is lower than the renter's monthly payment
  • With the tax savings of homeownership, the homeowner's payment is less than the rental payment after 3 years

Years

Rent Payment

Mortgage Payment

Monthly Difference

After Tax Savings

Yearly Difference

After Tax Savings

1

800

1000

-200

-50

-2400

-600

2

840

1000

-160

-10

-1920

-120

3

882

1000

-118

+32

-1416

+384

4

926

1000

-74

+76

-888

+912

5

972

1000

-28

+122

-336

+1464

6

1021

1000

+21

+171

+252

+2052

7

1072

1000

+72

+222

+864

+2664

8-30

 

 

Savings increase every year

I recently heard someone express a desire to rent a home and invest the additional money it would cost them to pay the monthly mortgage if they were to purchase a home. If you were to invest the difference, how much your investments return will be a major determinant of whether renting is profitable for you.  If your investments do well, it can make up for the potentially increasing rent; but if they do poorly, you may suffer from not only the poor investment, but rising rent as well. The real question is: how strict will you be on yourself each month to put that extra money into investments?

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Kate July 26, 2011 at 05:00 PM
In a city such as Newton, there is a significant advantage to renting- affordability. Single family homes in the Boston area average $300k, and in today's real estate market, you need a perfect credit score and 20% down ($60k) for that home purchase. As a realtor, you must realize that you are not making as much now as you made pre-2008, right? Well, most of aren't either. Buying a home is expensive and renting is a great option to try-out a town, reside in a community that you could not afford to buy into, etc. You also are only listing mortgage here. What about PMI? Homeowner's insurance? Utilities, including water/sewer (which are often rolled into rent payments)? Also, maintenance?
Adam Shamus July 28, 2011 at 04:52 PM
Hi Kate, Thank you for your thoughts. I completely agree that times are different and that renting can be a good option. I believe that I was clear about that in my piece. You are certainly correct that the chart did not contain utilities and maintenance however half of the rentals in Newton do not include these items so that is why they were left off. I would argue that regardless of if you are renting or owning you should be paying some sort of insurance. My main point in the article was that if you have a long term plan to stay in an area then buying is a better option. I would certainly agree that it doesn't make sense to buy something in an area that you don't know anything about or don;t plan on staying in long term. When I work with buyers a lot of what we do is spend time getting to know different communities before making a large decision. A few other things to point out; if you are putting down 20% on a home (which is of course excellent but by no means necessary even in today's market) then you would not need to pay PMI. In addition, despite the overall national trends, the Newton market has remained robust and has even gone up a bit in overall sales and dollar volume since this time last year so many Realtors who I talk to have actually stayed busy. I woudl be happy to talk to you some more on this if you have any other questions. Please don't hesitate to get in touch with me at adamshamus@gmail.com

Boards

More »
Got a question? Something on your mind? Talk to your community, directly.
Note Article
Just a short thought to get the word out quickly about anything in your neighborhood.
Share something with your neighbors.What's on your mind?What's on your mind?Make an announcement, speak your mind, or sell somethingPost something