Buying vs. Renting A House: Which is For You?
Deciding on whether to buy or rent a home is a very serious decision. There are many influences that will determine your decision including your location, the market environment, your family situation and your lifestyle preferences. Because paying for a place to live is most people’s biggest lifetime expense, weighing the options is critical to your financial well-being. While buying is undeniably an investment, it’s a far different kind of investment than buying stocks or bonds. Everyone needs a place to live. If you are on the fence on whether your next housing decision is to either rent or buy a house, we have mapped out the advantages and disadvantages of each option.
Renting a Home
When you are renting, you are only locked into the property for the term of your lease. After the lease has expired, you are free to negotiate a new lease or find another place to live. The hassle and cost involved with selling your property effectively give you less flexibility when you own a home.
Ease of relocating
When you rent, relocating for work is easier, less time-consuming, and potentially less costly. That’s why renters who change jobs often (or have steady jobs that require frequent relocation) typically rent until their professional lives stabilize. Though a sudden move may require you to break your rental lease, you can partially or fully offset the cost of doing so by subletting your apartment or negotiating with your landlord. As a renter, the worst-case scenario is that you are out several months of lease payments. As a homeowner, you might be forced to sell at a major loss, potentially wiping out your entire equity investment if your mortgage is too high.
No responsibility for maintenance or repairs
As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts, or an appliance stops working, you don’t have to call an expensive repairperson – you just have to call your landlord or superintendent.
When you initially agree with your landlord to rent your place, the down payment will most likely cost significantly less than the down payment when purchasing a house. For renters, landlords will typically ask for about two months rent in advance while homeowners are suggested to put 20% down when buying a house.
While homeowners need to maintain a homeowner's policy, renters would be wise to invest in a renter's insurance policy. Luckily for renters, renter's insurance is much cheaper and it covers quite a lot.
With homes getting larger and larger, it is often much more affordable to heat and power an apartment or small rental home as opposed to a larger home. Rental properties typically have a more compact floor plan, and renters can expect lower utility costs.
No equity building
No matter how long you remain in your rental unit or how exemplary a tenant you are, you can’t build equity in the property under a standard lease agreement. Renting offers no wealth creation or return on investment since the property will never legally belong to the tenant, and instead, the tenant is paying towards the homeowner’s home loan.
Limited control over housing costs
Your landlord has the ability to raise your rent once your current lease expires. Rental property owners raise rents to match rent increases elsewhere in the market, to compel current tenants to vacate the premises rather than sign a new lease, and for many other reasons.
No tax benefits
While homeowners can deduct property taxes and mortgage interest on their federal income tax returns, renters aren’t eligible for any housing-related federal tax credits or deductions. Depending on your property tax and mortgage interest burden, this shortcoming can raise your federal tax liability by several hundred dollars per year.
Buying a Home
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. Also, owning a home offers the long-term benefits of security, equity and potential growth in personal wealth.
You can deduct mortgage interest as well as your property taxes. 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 of home improvements
As a homeowner, your decorating, DIY projects and home improvement choices are all yours, provided they don’t break local building violations. You can paint walls, add new bathroom fixtures, update your kitchen, finish your basement, or build a patio or deck to your liking.
Hefty down payment
The down payment can be the most daunting expense for buying a house, which can cost up to 20% of the property’s price. Consider your options carefully before you put your savings down into a house, and make sure to leave yourself enough funds to cover mortgage and moving expenses.
Responsibility for maintenance and repairs
As a homeowner, you’re responsible for covering the cost of all uninsured maintenance and repair work on your home. This can include inexpensive repairs like fixing a broken toilet to complex and costly repairs like replacing a furnace.
A mortgage is a long-term legal and financial obligation. More than likely yours will be for 30 years. Suppose two years from now: You have a great job opportunity, but in order to accept it you need to sell your house and move; or, you want to get married, or unmarried, and your new home is no longer appropriate; or, your financial situation has changed and you would like to reduce your home-related expenses. Because a mortgage is a long-term obligation, picking up and moving on short notice, for whatever reason, will be significantly more difficult.
Buying a house is one of the most important decisions you will make in your life and requires a lot of research and thought. As you can see, there are plenty of pros and cons to buying vs. renting, and vice versa.
When you rent, you pretty much know what you’re getting into. You’re not going to make any money, but you’re not going to explicitly lose any either. And it’s mostly a hands-off type of deal.
With a home, you’re making a bit of a gamble on your future, and the future of the economy. After all, you need to put a certain amount down, and you need to ensure you keep making money so you can keep up with your mortgage payments. You’ve also got to set aside an emergency fund so you’re able to pay for repairs if and when necessary. But ideally, the tradeoff is that you’ll be rewarded for making that homeownership leap of faith.