The debate on whether to rent or to buy has been raging for a while now, and in all honesty, there is no right or wrong answer. It depends on whom you ask really.
A good deal of real estate agents, mortgage brokers or just about anyone with a vested interest in real estate will tell you that it is better to buy than to rent.
On the other hand, there is a school of thought that puts a good case for renting, arguing that pumping in money into a house or condo in the name of ownership is for the financially tactless.
As real estate investors ourselves, we believe there has to be a happy medium somewhere in between. Because what works for Jim and Lucy is not certain to suit the Forresters, and the other way around.
It’s a personal choice, and this choice will often be dictated by several factors.
Like market conditions, for example. What is the cost of real estate in your local market at present? Before you make the decision to buy or rent, it is important to understand the market conditions and how they could affect prices.
As well, depending on where you decide to put down roots, it might be cheaper to rent than to buy. This is especially true in notoriously expensive real estate markets where renting a home is more affordable than buying. Like San Francisco. Or NYC. San Jose. Or Honolulu. Unless, of course, you can swing it.
In other instances, staying in a rental unit can feel like throwing money away and it makes more sense to buy.
The stage of life you are in is also a deciding factor. Buying could make better sense for adults aged between 30 and 50 who have a family to think of. In contrast, those who have entered retirement without a house to call their own are better off renting. The average young person in his or her early 20s is also not likely to think about buying.
In this post, we outline the strengths and downsides associated with each approach, and we will let the decision rest entirely on you based on this knowledge.
The Pros of Owning a Home
Owning a home is one of the soundest decisions anyone can make in life, and that is because it is one of the most valuable assets money can buy.
From a financial viewpoint, a home is an investment whose value appreciates over time, earning you a decent profit when you finally decide it’s a good time to cash in. While there is an interest you pay on mortgage, the principal you fork out each month helps build equity in your home, something that can be drawn upon either through a home equity loan or when you sell.
Speaking of equity, renovating the property the way you want also doubles up as a great avenue to increase its value, provided of course, you carry out value-adding renovations.
This, in itself, is another benefit that comes with owning your own home. You see, when you purchase a home, it becomes your legal property and you have total freedom over its use without any restrictions from the landlord.
As a homeowner, you also wield creative control over your property. You can modify the property as you so desire, be it making small décor changes, carrying out major renovations or landscaping.
We cannot also forget the security that comes with owning your own home. There is nothing like the sense of long-term security associated with being a homeowner, free from the whims of a landlord.
As well, should you decide to generate income from the property, you are always free to rent it out. This is an approach that affords you possible tax deductions associated with income-generating properties, which means you can save some money in the long term.
Still on the subject of dollars, staying on top of your monthly bond repayments is a great way to boost your credit score.
Cons of Owning a Home
For all its benefits, owning a home is not without its downsides.
For one, it comes with huge financial responsibility, varying from the actual bond repayment to regular property maintenance and repair costs.
Homeownership also carries with it a long list of extra costs such as taxes, rates and insurance (all ongoing), never mind upfront costs such as origination fees (if you are purchasing through a lender), as well as title insurance, attorney fees, third-party charges like appraisal, closing and survey, the deposit itself among others.
Another downside associated with homeownership is that should the need to sell up fast arise, it is not as easy to liquidate as other investments such as shares.
Owning a home is also not a cast iron guarantee that you will profit from a resale when you do decide to sell. There are many economic factors at play such as high interest rates (or even recession) which could make the market conditions unfavorable for selling.
The location too may not be desirable to many buyers, and in the event you decide to relocate, moving home is not as easy as in the case of tenancy.
Lastly, if you are a retiree, the last thing you want looming over your head is a mortgage, assuming the house is not fully paid for.
Pros of Renting
There are instances when renting a home may be the more astute decision. This especially applies to those who cannot stay at the same place for a long time, whether due to personal reasons such as the need for change or travel, or due to job reasons.
As well, a tenant enjoys far much more flexibility than a homeowner. You can vacate a property within short notice, and you don’t have the headache of finding someone to take over the lease or purchase the property.
As a renter, you are not responsible for the costs associated with maintaining a home (including taxes), and as far as insurance is concerned, the only insurance you require is cover for the contents of the home.
You also find that, as a renter, it is absolutely possible to live in an area you might otherwise not be able to afford property in.
What’s more, when a tenant is done paying rent, they have more funds at their disposal which can be pumped into other investments without the need to worry about putting aside additional funds for a home loan.
Cons of Renting
Everything that has an advantage has a disadvantage, and renting certainly has its fair share of the latter.
One thing you find restrictive as a tenant is the inability to make desired changes to the rented property without the landlord’s consent. You are bound by the rules of the lease agreement which requires you to play ball, otherwise you are free to move on.
And assuming you are allowed to make your desired changes, renovations do not benefit you financially, but rather, the landlord.
The fact that the property is not within your control means that in case you need any issues addressed, it can take a while for them to get resolved, especially if there is a third party in the form of a property manager standing between you and the homeowner. It can be infuriating if the help is not coming as fast as the situation demands.
The biggest critics of renting also base their argument on the fact that since the property will never be the property of the tenant, renting has zero return on investment and instead, only goes to service the homeowner’s home loan.
As a tenant, you also hold no sway over annual rental fluctuations which may rise with inflation. Nor do you have any influence regarding last-minute changes in your contract or termination of the same, provided it is within the law.
Last Word
The right answer regarding whether to rent or buy a home is dependent upon an individual, and in some cases, the housing market you find yourself in.
There are times when renting is more financially savvy than buying, and there are also occasions buying constitutes the more prudent decision.
This is decision with far-reaching consequences, so when you find yourself at a crossroads, it is nice to think long and hard about it before you take the plunge.