Should you rent or buy a home?

Managing Real Estate Broker with Brad MacKenzie

There are pros and cons to buying and owning your home. There are also pros and cons to renting a home! When people ask, "Should I rent or buy a home?", they are really asking either a complicated question about all the personal factors that influence that choice, or a narrower, somewhat simpler question: "Is it LESS EXPENSIVE to rent or buy a home?"

"Well, all else being equal . . . "

The thing is, everything else isn't ever equal. Your personal situation, your goals and desires, your interests, are different for you than for other people. Not to mention that what is being offered for rent or sale in the market is constantly changing. Everybody's situation is different, and every real estate transaction is unique. 

For example, how much is it worth to you not to have to mow the lawn, pay for water or sewerage, maintain your appliances, or buy a new water heater if yours blows a gasket? Somewhere in the "invisible hand" of the market, those sorts of calculations are included in prices, but only for the "average" buyer. You are not likely to be the average person (with 2.3 children!); you are going to value some things more, and other things less, than other people.

Establish your baseline

That said, what you are left with is a math problem. Uh-oh: math. Luckily, a lot of the math can be done for you by plugging the numbers into a spreadsheet. More about that in a moment.

Even though doing the math won't completely answer the question, the reason to do it is to have a baseline for the trade-offs between renting or buying. Then, when you are looking at the choice between a renting or buying a particular home, you will have a firm grip on the numbers, and be able to make a much better-informed judgment.

Up-Front Costs

To buy a home, you'll need a down payment. The amount you'll have to put down depends on the kinds of loans available and the the loans for which you can qualify. Compare a down payment of anywhere between zero to 20% of the purchase price of a home to a rental where you might need the first month's rent, last month's rent and security deposit to move in. Your credit is a factor, so the guidance of a mortgage specialist will help you here. Pre-qualifying for a mortgage loan is a useful part of this exercise, even if you ultimately decide to rent.

Do you have a lot of credit card or personal debt? You might be better off renting until you pay those balances down. You also won't qualify for as high a mortgage when your credit card balances are high.

Closing costs are part of buying a home. Sometimes you have to pay these upfront, other times they can be rolled into your mortgage.

Taxes will be a factor if you are selling a house. It's important to consider your personal tax situation with a tax professional while you are making these big lifestyle and financial decisions.

Long-term Comparisons

Every house has yearly costs that are paid by the owner. If the owner is your landlord, your rent pays some or all of those costs. So, are you better off paying all those costs yourself and owning your own real estate asset, or is the rent low enough for you to let your landlord pay the costs and take the risks and responsibilities of ownership?

Since landlords want enough rent to offset the costs of ownership, there's always a loose relationship between the two numbers. When you do a purely financial assessment of the differences, the biggest variables are: how long do you plan on staying in your home and how fast will home prices and rents rise?

The longer you plan to live in your home, the better the financial rewards of buying a home. Common sense tells you that. Roughly speaking, if you are going to stay less than five years, renting is usually the better option. But a closer look at the market is often necessary. If you live in an area where home prices are low, the day when owning becomes a better deal than renting is likely to come sooner. If you want to live where home prices are really high, renting might always be a better bargain.

How fast are home prices going to increase over the time you plan to stay in your home? Will rents increase at the same rate, or faster, or slower? We don't know in advance, so we have to make our best guess.

As luck would have it, we live in a marvelous age, where technology can help us a lot. There are financial calculators now that didn't exist even 30 years ago that allow us to play around with many different scenarios. It's fast and easy to do this modeling.  Just plug in your numbers!

The New York Times published this interactive "Should you rent or buy a home" calculator.

Besides the up-front costs and the number of years you plan to stay in your home, this calculator makes it easy to consider many other financial factors that influence the buy-or-rent decision, including: the interest rate, home value appreciation, rent appreciation, condo fees, mortgage insurance, property insurance, renter's insurance, home renovations, repairs and maintenance, buying costs, selling costs, property taxes, inflation, investment returns, utility costs and your personal tax bracket. The better your estimate of these variables, the better the answer you'll get.

Should you rent or buy a home? Making a list of your personal pros and cons, plugging in the numbers in a rent-vs.-buy calculator will help you decide. 



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Brad MacKenzie

Turning Houses into Homes on the South Shore
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