Resource Center Buy vs. Rent

Buying vs Renting: Making the Case for Homeownership

Buying vs Renting

To rent or buy, that is the question many of you have when looking for your new home. In this blog post, we’ll take a look at the pros and cons of buying vs renting a home. Once you know the advantages and disadvantages of both renting and buying, you’ll have the right tools to make an informed decision.

The recent economic crisis has prompted some to question our views towards homeownership. However, questioning homeownership for this economic disaster is distracting from the real issues that will lead us to create a more effective and transparent housing market.

There were many factors that contributed significantly to the recent economic crisis. Among them: the credit rating agencies that did not adequately assess the risk of mortgage-backed securities, unscrupulous mortgage brokers selling risky loans to homebuyers who did not fit the risk profile, an out-of-whack mortgage industry that allowed consumers to buy homes without verifying their income or assets (or barely anything else for that matter), etc.

Responsible homeownership was not one of those factors. In fact, responsible homeownership was one of the reasons why the crisis wasn’t worse.

The focus of our industry going forward should be to create a culture of responsible homeownership. This starts with us – the professionals in the industry – educating our clients about mortgage products and features to help them make informed decisions and even letting them know when we don’t think they’re ready to buy a home. That’s why we’ve created the best mortgage calculator for home buyers.

With this in mind, let’s take a look at the top three pros and cons of buying vs renting:

Cons of Buying a Home:

1. Restricted mobility

Leaving a rental property is much easier than selling your home or keeping your home and renting it out to someone else. Generally speaking, if you’re not planning to stay in your home for at least four years, buying a home may not be the best option.

2. Property upkeep

Buying a home, especially a single-family home, requires maintaining the property. You should always budget for this additional cost when buying a home. When you rent, your landlord is responsible for damages to the property not caused by you.

3. Upfront investment

Buying a home requires a substantial upfront investment to cover the down payment and closing costs. Although your down payment builds equity in your home, and you can recapture that value later on when you sell the property, it can be a decent sum of cash with which you have to part for the moment.

Pros of Buying a Home:

1. You get to live in an asset that appreciates in value over time

We are just humans with basic needs, and among those basic needs is the need for shelter. Considering the alternatives (living out in the woods as a caveman or renting), owning your home helps you kill two birds with one stone: satisfying your basic need for shelter and accumulating wealth through the appreciation of your home (which historically has been over 5% per year).

2. A customized living experience

As they say, you are the king or queen of your own palace. When you own your home, you can paint the walls any color you want, change the floors, redo the kitchen, etc.  But when you rent, you’re at the mercy of your landlord’s style. That being said, I’m sure your landlord wouldn’t mind if you spent $20,000 upgrading the kitchen, but then how will you recapture that value?

3. Tax deduction

If you itemize deductions on your tax return, the mortgage interest rate tax deduction can save you thousands in taxes every year. And while we’re on the topic of homes and taxes, did you know that homeowners are exempt from paying capital gains tax on the first $250,000 of profit when they sell their primary residence? The exemption goes up to $500,000 of profit for married homeowners. By the way, you should always consult your tax professional about your taxes.

As you can see, there are strong arguments to be made on both sides. We have neatly organized these arguments (and a few more) in a side-by-side chart easy for you to compare:

OpenHouse


Should I rent or buy?

Renting:

Pros

Cons

More freedom of mobility: the ability to leave the property on relatively short notice

Don’t get to build equity in your home: (1) as you pay off the principal on your mortgage, and (2) by participating in the appreciation of your property.

Depending on the market, sometimes you can get more bang for your buck: for example, a $1,200 rent gets you a nicer apartment than a $1,200 mortgage

No preferable tax treatment: you don’t get to deduct rent from taxes

Less financial commitment: you’re not responsible for maintenance costs, property taxes, assessments. Of course, the landlord may pass these costs down to the renter, but you always have the option to move.

Landlord has the option to not renew your lease and force you to move

Much easier to rent than to buy (less stringent requirements): less paperwork, less financial due diligence, etc.

Subject to rent increases

Don’t get that cozy feeling of calling a place your own, which gives you the incentive to improve it and make it look nice. As a renter, you may even be imposed certain restrictions on what you can do with the property (e.g. paint it, etc.)

Buying:

Pros

Cons

Build equity in your home through paying down principal and property appreciation

Upfront expenses associated with the purchase (i.e. closing costs): you generally start to break even on these upfront expenses when you stay in a property for over 4 years.

Various mortgage tax deductions (if you itemize)

Ongoing expenses of property ownership: assessments, property taxes, insurance, maintenance costs

Stability: nobody can kick you out of your home (except your mortgage lender if you stop paying the mortgage)

Must be financially ready to buy: decent credit score; stable income; moderate liabilities; liquid assets for down payment, closing costs and reserves

Pride of homeownership: owning land and property is a source of pride for many people and it’s connected to healthy communities because homeowners are invested into the community at a deeper level than renters.

Restricted mobility: selling a home takes time and money. You may also be able to rent the home but then you have to deal with the headaches of being a landlord.

Susceptibility to market conditions: although property values have a tendency of increasing, we’ve all just seen that they can also be seriously depleted.

Still have doubts about this important decision?

Let’s take a look at two scenarios – one where you rent and another where you buy – to see how they impact your financial situation over the course of 30 years.

To make the analysis simple, we have isolated all possible financial variables by assuming that there is only one financial decision you will have to make over this 30-year period: whether to buy or rent. In both scenarios, you start with $50,000 in your bank account. In the buy scenario, you use the $50,000 towards your down payment. In the rent scenario, you invest the $50,000.

To make things even simpler, we ignored the closing costs associated with buying a home (which, in this scenario, could have added to about $5,000). However, to be as precise as possible, we also ignored the mortgage interest tax deduction homeowners receive, which can lead to thousands of dollars in savings per year.

View the two scenarios here.

Of course, we encourage every home buyer, especially a first-time home buyer, to use our tools to run the numbers for yourself and see if owning is best for you.

 

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