Is it better to rent or buy a home? Most adults ask themselves this at some point as they form their goals and plans for the years ahead. Before you answer the question, here are some things you should ask yourself. Owning and renting each have their advantages, but what’s best for you depends on your circumstances.
What will be the duration of your stay in the home?
Each market is different, but whether the time you plan to spend in the house warrants its purchase is difficult to predict. In general terms, it takes four to seven years to break even on a home (i.e., where there has been enough appreciation to pay back the cost of the transaction and the cost of ownership). If you’re thinking about buying a home and selling it in two years, buying is very unlikely to be cheaper than renting.
Do you think of or need your house as an investment in your retirement plan?
Canadians are used to their homes being a store of wealth to liquidate in retirement when downsizing their lifestyle. In 2015, Gallup reported that for the second straight year, more respondents named real estate than stocks, gold, savings accounts/CDs, or bonds as the best long-term investment. Real estate leads, with 31% of respondents choosing it, followed by stocks/mutual funds at 25%. A cautionary note though — although home prices have recovered from their pre-2006 market slump and continue to rise, the price of your home can fall, as well as rise.
What is your financial readiness?
Owning a home is a financial commitment that requires planning how home ownership fits into where your life is headed. Ask yourself what your budget is and if either to buy or rent a home would require you to stretch your finances. Crunch all the numbers. A frequent mistake of first-time home buyers is comparing a month’s rent to a month’s mortgage payment. Many people don’t have all the numbers. There are many additional fees necessary to include to make a fair comparison: principal interest, property taxes, property insurance, and ongoing maintenance.
Are you prepared for the down payment?
This is the lump sum payment that funds your equity in the property (how much of the property you actually own). Down payments vary; 20% is preferred and gets the best rates. There are some loans that allow down payments as low as 3%. Sometimes, relatives help with the down payment. If you have a choice, take a gift rather than a loan because lenders will add the loan debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43% to qualify for a home loan.
Can you afford the monthly mortgage and its components?
Affordability of the the mortgage and its components is key to know whether to buy or rent a home. Generally, a mortgage includes loan principal and interest plus property taxes. These items can affect the monthly loan-only payment by several hundred dollars.
How prepared are you to handle emotional stress?
A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life. Four events are specifically home-related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28), and change in residence (No. 32). If someone has recently made other life changes, such as marriage (No. 7), switching careers (No. 18), or having a child (No. 14), it might be wise to postpone buying a home. Stress overload can lead to missed payments, which can result in destroyed credit or even losing the home. It’s better to rent if your life is in flux and then buy when your stress levels are lower. This is important in deciding whether to buy or rent a home.
Are you ready for a commitment?
Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors? Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate and that will serve your needs (i.e., proximity to schools, shopping, recreation, etc.)? Are you ready to devote time and attention to maintaining a home (i.e., leaf-raking, grass-cutting, appliance maintenance and repair, etc.)? Taking care of your biggest investment can be gratifying, but only if you’re ready. This factor helps to decide whether to buy or rent a home.
Let’s consider some factors that will help decide either to buy or rent a home.
ADVANTAGES OF OWNING YOUR HOME
1. Control over housing expenses.
By selecting a fixed-rate mortgage, the homeowner assures himself that the housing costs will not increase for the next 5 years. Mortgages are renewed after 5 years at the current rate of interest.
2. You build equity.
Some of each monthly mortgage payment goes toward the loan’s interest. Other portions may go toward property taxes for the city. The remainder pays down the loan principal. Every dollar put toward your loan’s principal represents a dollar of equity — actual ownership of the property. Further, the property should appreciate in value each year, further adding to equity (what the house could be sold for versus what is owed on it).
3. Improvements increase your home’s value.
A homeowner can also increase a home’s value through home improvements, thus both making your home more comfortable and enjoyable while growing its loan-to-value (LTV) ratio. For instance, adding a bathroom or finishing a basement substantially increases the property’s functionality and appeal, while potentially boosting its value.
4. Tax advantages of home ownership.
There are significant tax benefits associated with buying a house, both at the time of purchase and for the duration of the time you own the home:
5. Current mortgage rates are relatively low.
Interest rates vary throughout the years. Several years ago, interest rates were higher, and it was more expensive to obtain a mortgage. Since these costs have been reduced, it’s now easier and less expensive to own a house.
6. Ownership rights and creative freedom.
Your decorating and home improvement choices are just that — yours, provided they don’t break building codes or violate homeowners’ association rules. You can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit your whims is a freeing aspect of homeownership.
7. A sense of belonging to the community.
Homeowners tend to stay in homes for longer than renters and are more likely to grow roots. They might join a neighborhood association, volunteer at a nearby community center, join a school group, or align with a business improvement district. Renters might not do any of those things, particularly if they know their lease is up in a year, and they might move.
There’s an intangible, pleasant feeling attached to owning your own house — a sense of freedom and independence. The home you live in belongs to you, and you can do what you want with it. You aren’t daunted by increases in rent or losing the lease. You’re free to make improvements and changes. Also, owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis; you never need to worry about a notice from the landlord to vacate your rented house or apartment for a variety of reasons over which you have no control.
DISADVANTAGES OF OWNING
1. Building Maintenance.
The renter’s largest advantage might just be the homeowner’s biggest disadvantage. While insurance might be available to protect against the expense of a major catastrophe, usual maintenance items are on the homeowners’ dime. Maintenance and repair can be as simple as repainting the baseboards, and can also be as extensive and expensive as replacing a HVAC system or sewer pipe. The expense will vary from year-to-year. However, you can expect to pay about 1% of the value of your home annually toward these expenses. If you live in an $800,000 home for 10 years, that’s $80,000 over the period, and perhaps more if you must replace a costly, long-lived mechanical item, such as a furnace. Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs.
2. Upfront and closing costs.
Buying a home entails numerous upfront costs. Some are paid out-of-pocket after the seller accepts your purchase offer, while others are paid at closing. These include the deposit, down payment (typically ranging from 5% to more than 20% of the purchase price), home appraisal, home inspection, and property taxes.
3. Loss of relocation flexibility.
It’s much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling a home from out of town involves special logistics and financial matters, such as dealing with the mortgage while the home is on the market.
4. Financial loss potential.
Homeownership builds equity over time; however, equity doesn’t equate to profit. If home values in your area go down or remain stagnant during your time as a homeowner, the appraised value of your home could decrease, putting you at risk of a financial loss when you sell.
ADVANTAGES OF RENTING
There are certainly advantages to renting to factor into your buy-or-rent decision. As one man’s pro is another man’s con.
1. Little or no responsibility for Building maintenance.
Admittedly, this is a big one. 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 repair person — you just call your landlord or superintendent. Renters in condos, townhouses, or apartments also don’t have lawn and grounds care obligations.
2. Ease of Relocating or Ease of Exit.
Rentals commonly require a contract (lease) and have a specific length of time of occupancy. Some are very brief – month to month leases (requiring a simple 30 days notice to vacate the premises if you choose). Some contracts (leases) are applied across multiple years. Typically, the longer the contract, the more likely your rent payment amount will stay fixed. This is an important point to consider. Rents fluctuate with the market, causing rent amount changes which are initiated at the signing of a new contract (once your old contract expires). Some owners allow the rent rates to stay the same as new contracts are signed. On the other hand, selling a home takes time and effort. If you have a short timeline to sell your home, you may be forced to accept a lower price and lose some of your investment.
3. Some rentals are located within apartment buildings or complexes, and are considered to have higher security.
These dwellings sometimes contain additional security doors at the building’s entry, security guards, key card access to parking and elevators, and other security features.
These features are sometimes seen as an additional advantage to renting, as they are typically not found in purchased homes.
4. Another advantage of a rental property may be the location.
In some cases, popular luxury areas may have higher priced properties. The cost of rentals in these same areas may be cheaper than purchasing these properties. In other words, the rental option may make living in these areas affordable, whereas purchasing may not be desired or affordable. There are many reasons for living in an area with higher property prices, such as more available amenities, schools with desired educational / sports programs, proximity to employment and more. You may also notice another benefit is that the rentals in these areas may have additional amenities like spas, pools, concierge services, on site dry cleaners, rooftop terraces, advanced exercise rooms, pet day care, on site theaters / libraries / grocery and valet parking.
5. No real estate market exposure.
Home values fluctuate and can decline over time. If you’re a renter, that’s not your problem. If you’re an owner trying to sell — it is.
DISADVANTAGES OF RENTING
1. No equity building.
The monthly rent you pay goes to the landlord. It represents the fee you pay for using the property. You gain no ownership of the property, no matter how long you live there.
2. Home improvements go to the landlord.
Any structural and decorative home improvements that renters make belong to the building owner and will have to stay behind when you move to a different place. Additionally, approval for the desired major redecoration will be necessary.
3. Reduced amount of freedom.
In most cases, during a rental period, the lease may restrict the number of guests you may have in your rental. Public areas around your rental may also have such restrictions. The property owner may require entry into your rental to perform inspections and reviews at the property owner’s discretion.
Additionally, many rental contracts include limitations on behavior on the premises, the number of residing members in the residence, and pet conditions (some may not allow pets at all, some require non-refundable pet deposits and some rentals restrict certain breeds of dogs).
Some rentals have restrictions on what you can do on the physical premises, which may include painting the walls, installing satellites for cable television, and more. Some even restrict activities, such as allowing BBQ equipment to the use of fireplaces and candles. Still, other rentals may not allow parties or large family gatherings. Lack of compliance with these rules can lead to increased expenses, revocation of security deposits, including possible termination of your contract, and eviction.
Some rentals may not have all the amenities you might want inside, with restrictions on adding them yourself.
Preferences around appliances and fixtures are typically not considered with a rental. Renters are required to accept what is available. In a purchased property, for example, one might choose to remove and replace an appliance to their particular taste. Some rentals may not have in-unit laundry or require the use of a shared laundry facility. In many cases, the number of laundry machines does not equal the number of residents sharing said machines. Many laundry machines are coin operated, which adds an additional cost to a renter’s monthly budget.
Finally, in some cases, rentals are near other rentals, which brings new factors that may not be desired. Noise levels, smells, pet activity, and other disturbances outside your rental may be experienced inside your rental with few available resolutions. Loud music from your neighbors in a purchased home may not affect your home due to the distance between the two properties.