Weigh the pros and cons between owning and renting
There is an upside and downside to either buying or renting. Buyers can argue that owning a bit of the American Dream gives them security that they can pass on to their children. However, that dream can be very expensive and financially limiting.
On the other hand, renters can have greater flexibility because it is simpler for renters to pull up stakes and move if the need arises. However, the money they pay each month helps the landlord’s financial security, not theirs.
So, let’s break it down. Renters first.
Advantages to renting over owning
You have fewer responsibilities.
Someone else will handle repairs.
There is only a short-term commitment needed.
There are not a lot of other costs.
You can invest down payment and maintenance money into other investments.
When you rent, you have fewer responsibilities. It isn’t your home, so you have less to worry about. In addition, you can expect your landlord to handle the repairs.
You can rent month to month, or to a short-term lease. There’s no real commitment. You can walk away virtually at any time.
When you rent, you generally pay just a security deposit upfront. If you need to, you may even find a rental that includes furniture. You will not have a lot of other expenses. If you don’t have extra money in the bank, renting is the way to go.
If you do have money, but choose to rent, you will have other options for investments. There is no demand for a large investment with a rental.
Disadvantages to renting over owning
It isn’t your home.
You might be asked to leave any time.
You will not share in any real estate profits.
There are no tax benefits.
When you rent an apartment, you are borrowing someone else’s home. You may not make any major changes in the property without getting permission and when you do, you are making improvements on someone else’s home.
In addition the landlord may not make repairs in the way you might wish. After all they don’t live there. When you own your own home, you can set things up the way you like.
Your landlord will probably give you a lease, a short-term time commitment, but at any juncture they might decide to sell the house or move back in. You could be asked to leave at any time.
If the real estate market improves and the house goes up in value, you will not share in the profits. You are in effect helping your landlord make the payments to the bank for their investment.
Your monthly payment to the landlord is not tax deductible. There are no tax benefits for you as a renter.
Advantages of owning over renting
You own your own home and can pass it on to your children.
You can make any changes you want to your home.
You can make a sizable profit on your real estate investment.
You can take advantage of tax benefits for homeowners.
You can leverage your money.
There is a feeling of pride when you own your own home. It is yours and you can pass it on to your children. Owning one’s own home is usually a strong goal for most people.
When you own a home, you can remodel as much as you like. Sometimes you might be restricted on what you do to the outside by the local government or a Homeowner’s Association, but for the most part you can do with it what you like.
If the real estate market goes up, your home can make you a lot of money. Since you put a small percentage of the value down, your investment can be remarkable, if the market is strong.
Every single dollar that you pay in interest for your primary residence is tax deductable if you itemize. This can save you a lot of money in the long run.
There are few investment opportunities that allow you to leverage your money the way real estate does. Even though you may only put a small percentage down, you still get the full value of the appreciation if the value increases.
For example: Say you put $10,000 down on your $100,000 home (10%). Now let’s say after 5 years your property is worth $120,000 (increasing 20%).
Your investment has gone up $20,000. That is your profit.
Your investment of $10,000 has brought you $20,000. You doubled your money.
Disadvantages of owning over renting
You must repair and maintain your property.
You will have substantial upfront costs.
If the real estate market goes down, you could lose your investment.
Mortgage “latenesses” hurt your credit score badly.
The monthly costs are usually higher.
It is a long-term commitment.
When you own your own home, you must pay for and handle every repair needed. You must also maintain the property. Lawn and pool care cost something each month, even if you do it yourself.
When you purchase a home, you must put money down and pay for closing costs. These are costs you must pay upfront. If you didn’t invest them in your home, you could earn a rate of return with another investment.
If the real estate market goes down, you could lose the money you put down. Selling your property might become impossible, without putting more money in to pay back the bank. These losses can happen quickly.
If you are late with your mortgage, even one month, it will severely hurt your credit score. If you are late often enough, you can lose your home. If you default and the bank forecloses, your credit score will take a long time to recover.
Conversely, when you are late on a rent payment it is rarely reported. The only time it can really affect your score is if you are evicted or if you skip out on your rent payment (which shows up as a collection). These factors will also directly affect your ability to get a mortgage later, as mortgage companies see your ability to handle your rent payments as a good prediction on how you’ll handle mortgage payments.
Your monthly costs are typically higher when you have a mortgage. Not only do you have principle, interest, taxes and insurance to pay each month, but you have all the other expenses that homeowners have.
When you rent, you can often work out a month-to-month arrangement. If you get a lease, it is for a year or two. With a mortgage, your loan is usually structured to be paid back over 30 years. You can sell your home at any time, but often it takes a while to find a buyer and if the market has declined, you may not have that option. Purchasing a home is usually a long-term commitment.