Buy Or Rent A Home?
Changes in the housing market can tip the scales one way or another at any time. In general, whether to buy or rent depends on a variety of factors, such as you financial situation, where you’re moving to, and how long you plan on staying.
Can I Afford To Buy?
You can get approved for FHA loans with a down payment as low as 3.5%. However, just because you can get a loan to buy a home, that doesn’t mean you should. Suzy Orman recommends putting down at least 10-20% and having no credit card debt before buying. The more money you can put down, the better. Some may balk at the idea of putting that much down, but it’s the smart play if you really value your financial future.
Of course, your income plays a significant role in whether to buy or sell. If you’re in the upper tax bracket, then buying is likely the way to go, assuming that you’ll be sticking around for awhile. Those who don’t have a lot savings are usually better off renting.
Keep in mind that there are additional costs to owning a home. You have to pay property taxes, which is almost like paying rent. You also have to factor in routine maintenance costs, as replacements and repairs are inevitable. You always have to be prepared in case your house gets damaged in some fashion, especially if you live in an area where natural disasters are more common.
Where Are You Moving To?
The price-to-rent ratio is a tool for determining whether buying or renting makes more financial sense in a particular city. It involves dividing the average sales price of a home by the average annual rent in the area. For example, if the average price is $450,000 and the average rent is $20,000, the ratio would be more than 22:1.
According to Kiplinger.com, a ratio greater than 20:1 suggests that renting is the better deal, while ratios below 15:1 indicate the buying is more favorable.
If you know that you’re only going to live somewhere temporarily (5 years or less), then renting is typically the better option. However, this may not always be the case from a financial perspective. For example, after living in a particular city for five years, you may end up paying more in rent than you would have as a a buyer. Zillow displays the breakeven horizon for many cities throughout the United States. The New York Times has a very handy buy or rent calculator that you can use also.
Money is just one part of the equation. Even if you do conclude that buying a house is a better deal than paying rent, selling your home is more inconvenient. The advantage with renting is being able to pick up and leave quickly. You don’t have to worry about hiring a real estate agent, home staging, showing the house, and so on.
On the flip side, the advantage of selling a home is being able to get get a return on your investment. Though, there is no guarantee that your house will sell right away. What if it sits on the market for five months?
There’s no guarantee that someone will meet your asking price. You may end up selling for an amount far less than what you paid for. Also consider that you’ll have to pay a commission to a real estate agent and possibly closing costs in most cases.
You also have to think about the housing market in that area. Is the economy strong? The truth is, you never know how much your house will be worth in the future. But if you live in a high demand area, then it will likely be strong in the future as well.
If you plan on settling down somewhere long-term, then buying ultimately makes the most financial sense, assuming you’re able to put at least 10% down. If you aren’t going to stay somewhere for at least five years, then your best bet in most cases is to rent.
What’s Your Preference?
With all things being equal, would you rather buy or rent? Both have their advantages and disadvantages. I think most people ultimately prefer to own a home, but not everyone wants to take on the responsibilities of being a homeowner. Owning a house involves more maintenance and upkeep, such as cleaning, doing yard work, painting, and so on.
The upside to buying to a house is being able do whatever you want with it. You can make improvements, upgrades, renovations, and so on. You’ll also likely have more privacy and get a return on your investment, whereas the money you spend paying rent is gone forever.
If you’re the type that enjoys being free, living near downtown, and being able to move on a whim, then renting is likely best for you. You might be the type however who prefers the suburbs, privacy, and solitude. Owning a home would make more sense if that’s the case.
Should You Rent First?
If you’re moving to unfamiliar territory, you might feel hesitant about buying a home initially. What if you don’t like the new city and realize you want to live elsewhere? One of the advantages of renting an apartment or house is being able to leave without having to sell.
Second, you may want to get more familiar with various neighborhoods in the area before buying. Renting for 6 months or a year will allow you to do more research so you can make a well-informed decision.
However, renting may or may not be practical depending on your situation. For instance, if you end up renting a smaller space than what you’re used to, you may have to rent a storage unit to house some of your stuff. You could donate or sell some of it instead, but that could mean having to buy a lot of it back when you decide to buy a home.
Also, renting a storage unit does come with some risks. The possibility of someone breaking in and stealing your items does exist. Water damage could occur as well.
Plus, it’s work. You have to track which possessions are where, and haul everything out when you move into a house. Not to mention that renting storage isn’t exactly cheap.
Renting can be tricky if you have children. They may have to switch schools once you buy a home, unless it happens to be in the same district. Changing schools again could be a very tough transition for them. One option is to rent in an area that you’ll most likely buy a home in.