Is it better to buy or rent a home? This article is going to dig deep into this question.
If you want to skip through this article you can grab a copy of my premium guide on buying compared to renting a home below.
Buying a home right after college or in your twenties has become indoctrinated in the minds of many of us.
There is a high value placed in society on ownership (at least there has been for years). Home ownership has become an axiom that is rarely challenged. There is a negative stigma that follows renting. This thinking is engraved into all of us and young professionals often want to purchase a home right after college.
I wanted to open up the discussion: to rent or to buy a home, which option is better? A question that will plague all college graduates and twenty-somethings as time goes on, salaries increase, and your parents start getting in the way of your love life.
Why has renting become overlooked? Why does everyone feel the need to buy a home?
All I can tell you is that I have done my research and put together the ultimate home buying guide and I take a detailed look at buying vs renting.
Questions to answer before deciding if you should buy or rent a home.
Is your income stable?
Are you an entrepreneur? If you are then your income has the potential of fluctuating greatly. There can be very prosperous months and then there could be months where you barely earn enough revenue to cover the costs.
Are you new to the work force? If you’re the “new guy” at the company then you have the opportunity to grow your career and move up within the company. On the flip side of the coin, you are at risk of being let go first when budget cuts hit the company.
How much will your salary increase?
Do NOT ever guess too high when it comes to future expected earnings. You don’t want to downplay your skills but there is no need to overestimate your future earnings.
Things to consider when buying a home:
Are you really buying this home?
When you buy something it means you’re purchasing it and it is yours. This not exactly what happens when you buy a home. Buying a home usually means that you are simply acquiring it through financing. You live in this home but you sure as hell don’t own it. You probably own the items inside the home but you don’t own the actual home. The bank owns the home and you are paying them to finance it for you.
Do not make quick decisions.
Do not sign any papers until you are 100% sure this home is for you. J of Budgets are Sexy wrote that he signed the papers to buy his home within 48 hours of seeing it. I don’t mean to point out J because we can all be guilty of this. Home buying is the single biggest investment we will ever make and it deserves to be treated as such.
How far is your work from the home?
You may like the community the home is located or it could be an amazingly low price, but how far will you have to commute to work? I have an older friend that purchased a large home at a low price just outside of the city. He calculated his commute and concluded that he would be driving 25 minutes to work each way. He was willing to accept this and determined it wasn’t that bad. Well he forgot to note one important piece of information- he calculated his driving time late at night. During rush hour and crazy traffic it can easily take him an hour each way when traveling to and from work.
A good time to buy a home in general may not be a good time for YOU.
Sure it may be a buyer’s market. Interest rates are very low at the moment. But don’t ever let the market dictate when the right time to buy a home for you is. For one, the perfect home for you may not be available at the time. You also may not have enough money saved up for a down payment. Low interest rates are excellent when home buying but they don’t mean much if you simply are not financially ready- YET.
Watch our for your pre-approval amount.
I want to buy a new house how much can I afford? – This is what many new home buyers will ask their banker. Just because a bank tells you that you have been pre-approved for a mortgage of $xxx,xxx it is by no means a final number. Don’t let that number be your sole home buying deciding factor. You should strive to find a home well below that price so that you can have some breathing room with your monthly payments.
Opportunity cost of buying a home.
If you buy one home you can not purchase another home unless you sell yours. This money is taken away from other areas of your life. Unless your income significantly increases this will mean- less traveling, less toys, less flashier wardrobe, less nights out on the town, and less money in general to spend. Are you willing to accept this smaller monthly cash flow? Is there any where else you would to spend or invest your money?
Pay off all of your consumer debt first.
Find a debt elimination plan that is right for you and make sure your consumer debt is paid off before you even consider buying a home. For one it will be a lot more difficult to get approved for a mortgage when you have outstanding credit card debt. Secondly, an unfathomable amount of your monthly income will go towards debt (mortgage & consumer debt combined).
Have an emergency fund in place.
It’s pretty much a given from a personal finance blogger’s perspective that an emergency fund is always needed. This especially holds true when you are pursuing a new endeavor (trying out a side business, moving out, traveling, etc.). An emergency fund is critical when buying a home because you never know when something within the home will break, leaving you very little tight financially for the time being. If you have a real emergency and your emergency fund isn’t sufficient you have something like payday loans you can turn to. These provide good access to finance without having to turn to a bank. Still you will want to have the emergency fund in place without having to solely rely on them.
Owning a home is not the only way to build equity.
Holding your money in securities or in a high yield savings account makes it fairly easy to access and liquidate. When you have your money tied up in real estate it is very difficult to liquidate it. You will have to find a real estate agent, put the home on the market, and hope that you find a buyer at the price you are looking for.
How long do you plan on living in the community?
Is the home you plan on buying in a community you would absolutely love to live in? If so, then buying a home could be the perfect decision for you because you will likely hold on to this asset until it has greatly appreciated in value (don’t forget about inflation) and your mortgage is all paid off.
Are you buying a home for the right reasons?
Many mid-late-twenty-somethings will buy a house for the intoxicating sense of approval that comes from peers when they find out you own a home. Have you made the proper calculations before investing this colossal amount of money into real estate? Could you have put more money towards your down payment if you waited? Could you have made a better investment with your money?
Are you ready for home maintenance?
You could invest in real estate through purchasing a condo. With a condo you will avoid having to do any maintenance outside of your own unit. When you invest in real estate by purchasing a home you are taking on a whole array of future costs. Your furnace could break down in the winter. Your lawn mower may die on you in the summer. You could break a window when playing baseball. Home maintenance costs need to be factored into your final decision.
Buying a home is not a forced savings tool.
If you want to save money then just setup a savings account and save money. Do not buy a home so that you have a reason to save/invest money. Buy a home if you need to move out and you require a shelter. Buying a new home should not be a convenient reason to save money every month. You will be pleasantly disappointed with the other costs involved with home ownership.
Home appreciation is not all profit
Housing prices have gone up over the years but so has inflation. You must also consider all of the money that you will have to spend on maintenance and the various other costs that come along with owning real estate. You home can appreciate greatly in value over time but do not consider this to be “all profit” as there is more to it.
Take advantage of the $8,000 Tax Credit
If you have already purchased your home (took me way too long to slip this into an article, sorry) take advantage of the $8,000 first time homebuyer tax credit. The purchase has to be made before December 1st, 2009, it has to be our primary residence, and you have to stay in your home for three years. If you see buying a home as a long term commitment then you should meet these tax credit requirements.
Erica wrote a post in June of 2008 on real estate prices. The lowest priced home in the area was $489,900. Now the lowest price in the same zip code is $319,000. Ouch that’s got to be a stinger. I will stress this once again- wait before you invest into buying a home, no matter how tempting the real estate property listings will seem.
Benefits of renting, as opposed to owning your home:
Is renting such a bad idea?
Someone else does the repairs.
When you rent a home you don’t have to stress about fixing every little thing that breaks. You can’t break things and expect to have them fixed, but every item that breaks on its own and is essential to running the home is in the hands of the landlord. This is a fairly arbitrary reason to choose renting over owning but some people simply don’t want to deal with home repairs.
Renting keeps you more flexible.
When you rent you have a higher degree of flexibility that you simply just don’t have when you own a home.
A common scenario- As long as you are near the end of your contract, you can easily get up and switch locations. You can move across town, across the country, or even back home with your parents if you want to save money.
An extreme scenario- You can try something completely out-of-the-box (see: Adam Baker) and travel the world when your lease expires.
Consumption goes up when you buy a house
Once you have paid all of the relevant costs for your house you are nowhere close to done. Now you will have to design every room in this home. When you rent an apartment you simply purchase enough furniture for the living room and bedroom and you are all set. With a home you will likely want to extensively design every room. From a “guys room” in the basement to an “entertainment hub” in your living room, to a “home office” upstairs.
Save more money with renting.
The common adage that claims renting is “throwing money away” does not exactly hold true these days. Depending on the location and the size of the unit, you can potentially save a couple of hundred dollars a month when you rent. By renting you avoid: mortgage payments, property tax, insurance fees, maintenance, and upgrades. In a perfect world you can save some decent coin.
BUT… This is only in a perfect world. If you are a very financially conscious person and you have plans in place to save and invest the money you save, renting is an ideal option. Unfortunately, what ends up happening is that most people use this money towards life in general.
(Aside: Property tax is considered a financial benefit of renting, but it is calculated in your monthly rent by the landlord in most cases.)
Renting is not “throwing money away”
I could not put together a reputable article on home ownership compared to renting without addressing this form of so called, “conventional wisdom.” You are paying for shelter. Sure you will never see the $1,000 or so a month on rent you pay, but, you are paying to have a roof over your head. When you own a home you will never see many of the costs again. It’s just apart of life. If you want to live in a safe and clean area,with a roof over your head at all costs then you’re going to have to pay for it. If you are completely convinced that paying for rent is such a waste then don’t move out.
How large should your monthly mortgage payment or cost of rent be?
@RJ Weiss: Depends on how much maintenance your home requires but as a rule of thumb I would say no higher than 33% of Gross Income.
@Ericabiz: Your mortgage payment should be far less than your rent. Rent includes maintenance + structure insurance.
@MoneyMatters: Dave Ramsey suggests no more than 25% of your income.
Should you rent or buy?
@MoneyMatters: Here’s my take on the issue.. “don’t buy a house just because people say it’s a good time to buy”
@Budget Pulse: You should rent.
@MattJabs: If you have money saved, buy. If you don’t, rent. Don’t go into debt.
My take on renting compared to buying a home:
I’m not here to give you an answer. I simply want to help make your decision easier by presenting both sides to the home ownership compared to renting argument in one clear and concise article. At the end of the day, what you choose to do depends on your financial goals, more importantly, your life goals.
Do you want to travel the world? If you want to travel in your twenties or thirties it’s going to be fairly difficult when you have to deal with a mortgage.
(An older friend of mine would only rent when he was younger. He would rent an apartment and then rent out a storage unit for all of his possessions when he found a temporary opportunity somewhere else or just wanted to travel.)
Do you want to take entrepreneurial risks?
Do you want to start a family and live in a safe area?
Do you want to be bachelor for the foreseeable future?
All of the above information needs to be consumed and the questions need to be addressed before deciding on whether you will invest your hard earned money into real estate or if you will opt to rent an apartment. I can’t answer these questions for you but I do hope that you answer them yourself.
I also hope I didn’t scare any future home buyers. I just wanted to put together an article that included every possible detail about the largest investment that many of us will ever make.
What’s your take? Is it better to buy or rent?