When it comes to real estate, there is one very common question that people ask themselves……
Should I buy a house or rent a house?
Choosing between renting or buying a house is not as easy as it seems. After all, it is one of the biggest financial decisions one can make in his or her adult life.
Decades ago, buying a house would be the most sound advice one could ever get. However, this advice isn’t as wise as it used to be. There is no single right answer to the question anymore because everybody’s lifestyle, finances, nature of work and personal relationships are different.
Both situations also have their own advantages and disadvantages – and these go beyond the financial aspect. The only way to decide on which is best is to look at these pros and cons and come up with a decision that suits you best.
Pros of Renting a House
- Flexible – Renting, especially if you are on a month-to-month lease, offers you plenty of freedom and flexibility. If you don’t like the place, you can easily move to a new one without having to worry about the need to sell a house. This factor is attractive if you are new to the area of if you haven’t settled into your career yet.
- Close to zero maintenance work – Another good thing about renting is that you do not have to deal with maintenance and repairs. Unless you damage a part of the home on purpose, most repairs are passed on to the property manager or landlord to take care of. The downside to this is that some landlords and property managers take quite a long time to respond to requests, and may take days or weeks to fix problems on the property. The best way to get around this is to do a background check and read reviews on the property management companies around the area. This way, you’ll have an idea on their turnaround time and how well they work with lessors.
- No depreciating value – While prices for real estate have stabilized and now continue to rise in many housing markets – this trend still isn’t a guarantee. The risk of owning a home with decreasing value is still there. When this happens, you may be forced to eventually sell it at a lower price than you actually bought it for.
- Requires less “up-front” cash – Unlike buying a house where you need to pay for down payments and closing costs, you do not need to spend as much when renting a house. You will generally need to shell out about two to three months worth of rent upfront to serve as deposit and advance monthly payment.
Cons of Renting a House
- Possible increase in monthly payments – Rent has rapidly increased in many major cities, especially if you live in an ideal neighborhood. This means the possibility of facing increased monthly housing payment as soon as the current lease is over
- No equity – Renting provides you with a place to live in at the moment, but you do not have an asset which you can sell when you are ready to move. 100% of your payment goes to your landlord, which is actually one of the biggest discouraging factors when it to renting. Aside from the fact that you do not have any ownership of the property, it’s also the thought that every dollar of your rent all goes down the drain.
- No tax benefits – Homeowners get tax benefits, allowing them to deduct housing expenses such as mortgage interest payments and property taxes from their federal income tax. Renters on the other hand cannot deduct their housing expenses.
- No creativity – While some landlords are flexible enough and allow you to repaint property walls – you will still need to go through a tedious process of getting their permission. Some landlords are stricter and may not even allow you to drill holes or install certain fixtures.
Pros of Buying a House
- Home ownership – Granting that you pay your mortgage on a regular basis, buying a home means you’re well on your way to becoming an actual owner of a house. For many people, the idea of ownership can be a source of pride. Aside from that, owning a house gives you the creative freedom to decorate and do as you please. You also get to be part of a community, considering that you’ll be living there for a long time.
- Build equity – Equity refers to the difference between the value of your home and how much you owe on your mortgage. The more payments you make, the more your home ownership increases. This in turn increases the overall net value of your assets and allows you to trade it for other assets (like funding for the purchase of a new house, or taking out a second mortgage) in the future.
- Tax breaks – Mortgage interest and property taxes can be used as tax deductions when you start to itemize your federal income taxes. If you work from home, you can also take extra tax deductions for the expense of your home office, as well as a portion of the utilities you use.
- Stable housing payments – Unlike rental payments that almost always increase once your lease term ends, taking out a fixed-rate mortgage means that your housing payments remain the same throughout the duration of your loan.
Cons of Buying a House
- Maintenance and other expenses – Owning a home requires long-term financial responsibility. This goes beyond paying your mortgage and utilities. You’ll need to spend for other expenses such as property taxes, homeowner’s insurance, and home maintenance repairs.
- Illiquid asset – If circumstances require you to relocate or if you eventually decide that you do not like your neighborhood – there isn’t much you can do about it right away. You’ll be stuck and might not be able to sell your house and convert into cash immediately.
- Potential depreciating value – Any kind of investment – including real estate, carries the risk of losing value. Sometimes a market can fluctuate, causing your home value to depreciate, leading you to owe more money than how much your home is actually worth.
- Requires cash to buy – You will need money to make a down payment and spend for closing costs on the house – and this usually costs more than the money you need to spend upfront when renting a house.
What are your future plans? While you can’t really predict where you will be in the next five years, you should keep your goals in mind. Where do you see yourself, career wise, in the next five years? Will you see yourself moving to a new city? If so, then renting may be the best option for the meantime.
Do you have the financial capacity to buy a home? Not everyone is financially capable of buying a house. To determine if you are, check out this financial capacity checklist.
How much do you need to spend? Knowing how much you need to spend is very easy when renting a home. To move in, you’ll most likely need to make a security deposit and advance payment. Buying a home costs more money upfront. Depending on you’re the type of mortgage you take out, you can expect to spend about 10 to 30 percent of the house’s total price for earnest money, down payment, closing costs, inspections and cash reserves. Aside from these major expenses, there are other costs such as repairs, moving and furnishing the new place as well.
Buying a new home is a decision that should not be done on a whim. It is a big responsibility, but as long as it is planned out right, it can be one of the most rewarding and financially sound investments you can make.
Do you currently own your home or do you rent? What were the biggest factors that helped you decide?