When evaluating whether to buy or rent your own place, it appears as if the decision were quite simple.
If you can cobble together enough cash for a down payment, comfortably afford the mortgage payment, and don’t carry excessive debt, then no problem, right? After all, when you rent you are simply ‘throwing money away’. This must be a no-brainer…
Perhaps, but let’s consider a few things.
Buying
Buying can be an extremely rewarding endeavor. You have the opportunity to take advantage of appreciating property value and will build equity over time.
Before making the leap, there are a few more components to consider.
Property Tax — It is common for first-time buyers to overlook the other costs associated with ownership. Aside from acquiring a sufficient down payment and planning for the monthly mortgage payment, consider what it will cost you in property tax to own the property.
Maintenance — While renting, you were not responsible for replacing a broken dishwasher, refrigerator, or water heater. As the owner of the property, that cost is now yours! Set aside savings that are dedicated to any future repairs for aging equipment. Also, ensure that you aren’t using up your entire savings just to make the down payment. You could find yourself in a bind if something went wrong.
Insurance – As with your car or your health, it costs money to insure your home. Be sure to research insurance rates for your local area.
It is also a rule of thumb that you should consider buying only if you intend to stay in the same place for five or more years. Why that long? Well, it costs money to buy and sell a home.
Closing Costs — It will cost thousands in closing costs just to purchase the place, and then again to sell.
Commissions — If you use a real estate agent to prepare and facilitate a sale, there will be a commission paid to the agent once a buyer is identified.
It will also cost time, energy, and resources to get a house prepared to sell (don’t forget those blemishes you have been neglecting). The process of finding a buyer and then closing the deal will take additional time.
Renting
While it is true that you will not build equity in a property by paying someone else for the right to occupy their residence, there are a couple of good reasons for deciding to rent despite being equipped financially to purchase.
Cash flow – In many locations, the monthly payments for rent are less than what you would pay on a mortgage (sometimes greatly so). With lower monthly payments, you could be pocketing the difference as savings. If the gap between the two is significant, you could be saving hundreds per month.
Mobility – If you are unsure whether you will be staying in an area for the immediate future, renting affords you the ability to pick up and go, should you need or want to be someplace else. Working on a contracted assignment? Young professional eager to try somewhere new? Consider renting.
The Decision
Consider your personal situation, calculate the true costs of ownership, then come to a decision. You will know what is right for you.