Buy vs rent – A young couple that we will call Barb and Ron have been dating for a while and think they will probably get married in a couple of years. They have decided to move in together. The question before them now is “ buy vs rent ”. They want to do what is best for both their financial situations and their future but they are unsure whether or not buying something would be a good thing. Every year many couples find themselves in the same sort of situation. Let’s see if we can help them figure buy vs rent dilemma out.
Neither Barb nor Ron has lived with anyone other than parents or roommates in college dorms. This will be the first step in adulthood for both of them. Let’s review buy vs rent for this couple.
Buy vs Rent – Benefits of Renting
• If they decide to rent, they will be pooling their money in order to pay a monthly fee to a third party. It is possible that the rental amount may increase without prior notice. They will not have a deduction for their rent on their taxes.
• There will be a deposit that must be paid (usually equal to one month’s rent) that they will not be able to recoup until they decide to stop renting from this person. This is like losing an entire month’s rent because it cannot be accessed.
• Many leases have clauses that say you cannot paint, wallpaper, or change the interior of the apartment so they can’t put their own stamp on it.
• On the positive side, they will not have to worry about the maintenance. The apartment building or home owner will have to fix the leaky pipes, repair the roof, and pay for repairs after a storm. They will not have to mow the lawn or plant and maintain flowers and trees. If there is a pool, the owner will have to hire someone to maintain it. The owner will also have to take out insurance to protect himself against accidents and liability from them.
• Renters can leave anytime they decide to change where they live. They may have to buy out the remainder of a lease but there are no other ties. A homeowner would have to find a buyer for one home before buying another. If you decide that the neighborhood where you rent is not for you, moving is an option.
• If the duo discovers that they cannot live together and that their plans to get married have come to naught, they won’t have to deal with dissolving homeownership. They can split up as soon as they decide it won’t work. They will only have to divide their personal property.
• Mobility is a big part of the rental life style. When renting, people often are able to afford amenities they would not be able to afford if they were homeowners. Rental buildings may come with a pool, a gym, even beachfront property that the renter would not be able to afford if buying.
• In most areas of the United States, it is cheaper to rent than to buy.
• With housing prices still falling, it will be difficult to plan for long term growth until we know the housing market has bottomed out.
• If you are living in a huge apartment and lose your job, you can always move into a smaller apartment. If you lose your job while paying for a house, you may also lose your house through foreclosure and thus destroy your credit rating.
• When you own you will have to spend a great deal of time with maintenance, cleaning, and upkeep of grounds. When you rent, this is done by someone else; leaving you with free time and extra money.
Buying brings a different set of challenges and benefits to the buy vs rent table.
Buy vs Rent – Benefits of Buying
• A homeowner can take the mortgage interest off taxes at the end of the year. There may be other tax breaks for energy efficiency.
• A homeowner builds equity as he/she makes the monthly payment.
• A homeowner sinks roots into a community
• A homeowner builds family pride as he/she takes care of the home and yards.
• Housing prices are currently at a low and a new homeowner can get a real bargain if he/she shops around.
• In the negative column, to purchase a home you will need to have a down payment usually equal to 10% or more of the purchase price.
• To purchase a home you will need to be pre-qualified by a mortgage company or a bank so that you will know exactly how much money you have to use.
• Your monthly payments will be stable and you will not have to worry whether or not they will be raised unless you have an Adjustable Rate mortgage. Even then, you know when the payment will change and what percentage of change is possible.
• You can decorate this house any way you wish (unless there are homeowner association rules that prevent this).
• You have to plan to replace appliances. Washers, dryers, refrigerators have a bad habit of not working at the most inconvenient times. If you are the owner, you have to pay.
• You must budget for mortgage insurance, liability insurance, as well as homeowner’s insurance
• You must budget for maintenance of the building and the grounds.
• You have to budget for cable, telephone, utilities, gas, and internet access. Many of these things are often included in a rental lease.
• You will have a great deal of your cash tied up for a long period of time.
• The value of your home can fluctuate with the financial woes of the day.
• You must make your monthly payment or lose your home and all the money invested in it.
• If you decide you want to move or if your job changes and you need to move, you will have to sell your house to buy another one or rent it to pay the mortgage.
Buy vs Rent – Know the housing market in your area
Buy vs rent – A buyer must also consider the housing market in the area he is considering. Never buy a house in a market that at the top. If the value of your home plummets with the housing market, you will lose the money you have invested. It can take 6 months to a year to sell a house. You may not be able to liquidate quickly if there is a job change, a divorce, or some other life changing event.
Buy vs Rent: Review your finances; what can you afford?
Our couple, Barb and Ron, must each make a budget based on his/her income to see how much money will be available for their co-habitation. It is not necessary to share the entire budget with each other if each person is keeping a separate bank account and financial information. However, if they decide to buy (as a couple) both financial reports will be examined and the two will be linked in the purchase so his credit score can affect hers and vice versa. Once it has been decided how much fluid cash is available to be used for living expenses each month, the couple can talk about buy vs rent. The amount of money necessary to be prepared for homeownership might be a deal breaker. It might also be better to rent for a time to see if living together is going to work.
Buy vs rent – Once Barb and Ron have it all down on paper and can look it over several times, they will be more ready to decide whether to rent or own.