Health & Fitness
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.
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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
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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?
