Maybe you are a new college graduate who is planning to move out of their parent’s house, or maybe you are someone who has been renting for years and you are trying to choose between continuing to rent and becoming a homeowner. We all have to contemplate this question at some point in our lives, and your decision can have drastic consequences for your future finances.
Before you decide whether you should rent or buy, it is important that we understand what each of these actually mean. When you are renting, you are basically paying some homeowner to reside in their home (or apartment). Each month you write a check to the landlord, and as a reward for paying they don’t kick you out of the house. Renting is more flexible than buying, because it usually is a shorter commitment. You will likely have to sign a contract agreeing to pay the monthly amount, agree to stay for the renting period (or pay a cancellation fee), and probably put down a security deposit to demonstrate to the landlord that you do have intent to move in.
When you choose to buy a property, this is a longer term commitment that has a lot more paperwork! You will still be writing monthly checks, but instead of writing them to the owner (You are the owner!), you will write them to the mortgage company. Also, when you are buying a property, you are paying for a lot more than just the loan to own the house. You will be responsible for property taxes, home maintenance, home insurance, and perhaps some Homeowners Association fees.
Pros and Cons of Renting
One great thing about renting, is after you stay for the time you agreed to you can leave with no hassle! Lets say you start renting an apartment and a month or two in you start to realize how loud it is at night. Well you can stick it out the rest of the year until your lease expires, or pay a cancellation fee and leave sooner, or leave immediately if you have a month-to-month agreement.
On a bigger note, maybe the property is fine, but you hate the area of the country you are living in. When renting you are able to be more spontaneous in deciding where to live. You can choose to live in the south one year, and then next year decide that you would rather live somewhere colder in the north. You don’t maintain a long term responsibility for managing the property you are living in.
Speaking of managing the property, as a renter you are also not responsible for repairs and general maintenance of where you are living (unless you caused the damage). All you have to do is to call up the landlord and then it’s their job to fix it.
It is good news that you won’t have to worry about repairs, but there’s no guarantee that your landlord will decide to put much effort into fixing the property’s problems. They could be neglectful, and just bank on the fact that you have to complete your lease before they have to fix it for the next set of renters. You may have better luck if you are renting month-to-month since landlords would rather have you happy, but just keep in mind that your mileage will vary based on who the landlord is.
One downside to renting is that it is inherently unstable. If you are renting a property for $1,000 a month, next year there is not guarantee your rent will stay the same. Some of this rent increase just comes from the market, but it can also come from your landlord wanting more money. In most places if the landlord provides ample notice, they can demand that instead of paying $1,000 a month you now have to pay $1,300 a month. Your options now are either to move out or to swallow the extra cost per month.
Arguably the biggest downside of renting is that the only thing you gain from paying rent is a place to live in the short term. As you are making those monthly payments, none of this goes toward owning anything. Even if you find an amazing property with a super friendly landlord for cheap, you still aren’t building equity like you could if you purchased a house.
Pros and Cons of Buying
The biggest upside of buying a house is that you own an asset that can increase in value. This means that while you are living in your house, it continues to appreciate in value over time. We can conservatively estimate that on average property values increase 4% a year, so after 20 years your house could be over double what it is worth now. This profit you get from selling, will help greatly to offset the the money you are paying monthly to live and maintain your property. In a hot house market, your house may actually increase so much in value that after you sell it, the proceeds mean that you have effectively lived for free!
In a hot house market, your house may actually increase so much in value that after you sell it, the proceeds mean that you have effectively lived for free!
Another great aspect of home ownership is property control. If you are living in a rental property and you don’t like the color of the paint on the wall, chances are the landlord will not let you repaint. However, if you own the house, you can do whatever the hell you want! If you want all the walls painted pink, nothing is stopping you. There are of course some practical limits, like maybe your homeowners association doesn’t allow certain stuff in your yard, but typically on the inside everything is fair game. This is a luxury not afforded to renters.
While buying a house has great upsides, there are also some downsides that don’t come with renting. One of these downsides is maintenance and repairs. Unlike with renting if something in your house breaks, you are the one who needs to fix it. General house maintenance can be estimated by using 1% of the total home price per year. If you don’t take initiative to fix something broken or just generally maintain your property, it will deteriorate over time. Buying a house is not just a financial responsibility, but also an organizational one.
Another downside with a house is lack of flexibility. If you buy a house in an area and don’t like the area, or you get fired and have to relocate, selling the house after a year will result in you losing more money than if you just rented instead. However, this can also be viewed as a positive. Owning a home comes with more stability. Your monthly payments are constant (with a fixed-rate mortgage), and you know that you can stay there as long as you keep making your payments; there is no landlord to kick you out if they decide to sell the house.
Which is right for You?
In general the longer you plan to be at a property, the more sense it makes to buy instead of rent. This is because a portion of your mortgage is going toward equity when you buy a house. However, not everyone is able to afford the down payment for a home or has a good enough credit score. If you want to purchase a $300,000 home, then even a down payment of 10% is going to put you out $30,000. But even if you don’t have much money saved up, there’s still a chance you can buy a property. There are many government assistance programs, and even the possibility that you can find a mortgage company that offers a 0% down payment.
If you are confident that you will live in an area for a while, don’t mind the extra responsibility that comes along with owning a house, and are financially stable enough to support this kind of purchase, I recommend looking into buying a house. If you prefer the increased flexibility and/or aren’t financially comfortable enough to put down a down payment, or aren’t stable in your income where you could quickly become unable to pay monthly payments, you may prefer to rent. If you do end up buying a house, this can easily benefit you long term. You get to live in your property while it continues to increase in value.
