Buying vs Renting – Which is Right for You?
I wrote this post in late January of 2019. It was published as a guest post at www.thepoorswiss.com
Check it out here: Buy or Rent – Which is Right for You?
With that out of the way, let's begin.
Are you moving out of home and can't decide whether to buy or rent? Owning a home is generally preferred; however, financially, this might not be an option for you right now.
In this post, will explore the pros and cons of each, so you can decide what is best for you. But before I begin, you will need to answer a few questions:
- How long do you plan to live here?
- What is the price of housing in your area?
- Do you have any savings?
- Do you have a decent credit rating?
- Can you afford to perform regular maintenance?
Buying a House – Advantages
Purchasing a home is a significant decision for anyone, especially a first home buyer. I will now explore some of the advantages of buying a house.
1. Avoiding inflation
You can avoid inflating house prices if you buy now. Essentially, if houses in your area are appreciating, you may not be able to afford the same house in five years, after inflation.
You can avoid this expense if you buy now. Assuming you plan to live in your house for at least 5-7 years, buying now may be the better option.
2. You Own the Home
This is an obvious one but could not be skipped. You cannot be evicted when owning a home, unless you are not able to regularly make your loan repayments. There are many circumstances whereby a landlord can evict their tenant, as I will explore further in the renting section.
3. Homes Generally Increase in Price
As mentioned above, houses typically appreciate over time. Meaning you will be able to sell for a profit later down the track, whether you want to upgrade, or for other reasons.
Let's assume you bought your house for $200,000. In 10 years, growing 3% annually, your house will be worth $268,783. After 20 years, the power of compound interest will be more clear-cut, and your house will now be worth $361,222 not bad!
This gain is less significant when adjusted for inflation, but it is important to remember that houses typically appreciate over time.
4. Mortgage Interest Tax Deduction
Depending on your location, and the price of your house, the interest you pay on your mortgage may be tax-deductible.
However, in 2018, the criteria allowing you to claim your mortgage interest on tax in the US has been changed. It is important that you are aware of this change before purchasing a house in the US.
For more information on the Tax Cuts and Jobs Act, visit The Motley Fool. They published an article full of helpful information regarding mortgage tax deductions in 2018, in the United States.
Buying a House – Disadvantages
Purchasing a home does not come without its disadvantages, as you will find out below.
1. Price May Fall
There is always potential for your house to drop in value. Meaning you would have been better off renting, thus avoiding the loss. However, houses typically rise in price over the long-term. According to this logic, any losses will likely be reversed in the future.
2. Requires Substantial Capital
Generally, you are required to spend hundreds of thousands of dollars to buy a house. Not only is a house expensive, you are typically required to make a 6% down payment when securing a loan for a house.
A down payment, is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the portion of the total amount and is usually given in cash at the time of finalizing the transaction.
For example, if you were buying a $200,000 house and were required to make a 6% down payment, this would equate to $12,000.
3. You Are Responsible for Upkeep
Performing general maintenance is part of owning a house, general home maintenance may include:
testing your carbon dioxide detectors, getting your air conditioner serviced, inspecting your roof for damage, leaks and other common issues.
These are among the many tasks required of you when owning a home, tasks that are carried out by your landlord when renting.
Renting a House – Advantages
A few advantages of renting of a house are listed below.
1. Minimal upfront costs
There are minimal upfront costs associated with renting. Therefore, you will have a place to live without the headache of pulling out a mortgage, organizing a builder and so on.
2. You Aren't Tied Down
In the US, you are typically required to give the landlord 1-2 months' notice before vacating; however, when owning a house, assuming you want to move out or otherwise relocate, you will likely have to sell your house.
Meaning you will have to find a real estate agent, clean the house from top to bottom, and undertake other time-consuming tasks.
3. No Closing Costs
As a tenant, you aren't required to pay the closing costs associated with buying a house.
Closing costs for home-buyers in the US are typically 2-5%, and include inspection fees, appraisal fees, lender's title insurance, underwriting fees and more. It is important to consider these costs when making a final decision.
Renting a House – Disadvantages
Here are some of the disadvantages of renting a house.
1. The Landlord Can Make Changes
The landlord might decide that it is more profitable to sell the house, rather than rent it out to you. Contrarily, they may decide to simply raise the rent to increase their cash-flow. Either way, this is bad for you, and something you must consider before renting a house.
2. No Tax Benefits
As mentioned above, you are typically able to claim mortgage interest on tax when purchasing a house; however, when renting, you are not eligible for these benefits. You are simply paying to live in someone's house.
3. Choices May Be Limited
There is more freedom associated with the purchase of a home. You decide where to buy land to build or browse around and see what houses are available for purchase.
When renting, you will simply have to find a place to live, and do not have these privileges. You may even be required to share a house with other tenants, if you cannot find another place to rent.
There are strong arguments for each of these options, in the end, it all comes down to you. I have included a summary of the pros and cons of buying vs renting below. Using this information, I hope you can make a more informed decision regarding buying vs renting a house.
Advantages of Buying
You Own the Home
Homes Generally Increase in Price
Mortgage Interest Tax Deduction
Disadvantages of Buying
Price May Fall
Requires Substantial Capital
You Are Responsible for Upkeep
Advantages of Renting
Minimal upfront costs
You Are Not Tied Down
No Closing Costs
Disadvantages of Renting
Landlord Can Sell the Property or Raise Rent
No Tax Benefits
Choices May Be Limited
Now that I have compared buying vs renting, visit ThePoorSwiss for more great personal finance posts.