Rent vs. Own: How to Decide Whether to Rent or Buy a Home
For Jessica Rivas, the benefits of buying a home seem almost endless. “No upstairs or downstairs neighbors,” says Rivas, 26, a new home owner living in Milwaukee, WI. “You get your own yard, there are no restrictions on pets, and you can remodel without having to get permission.”
Andrea Hartmann, a 29 year-old sales assistant at Living Dimensions Real Estate in Milwaukee, also points out the many financial and emotional benefits of buying a house. “Home ownership provides multiple tax incentives and the ability to make money on your investment,” she says. “Plus, there’s the overall pride of ownership.”
While home ownership has plenty of appeal, it’s also one of the most difficult financial decisions facing young people. Consider the following questions when deciding whether to rent or buy:
- What do your debts and cash flow look like?
- What are your long-term career and life goals?
- How much time and energy do you have for home maintenance?
- What are the costs of renting versus buying where you live?
- How long do you plan to stay in your first home?
What do your debts and cash flow look like?
If you struggle to make rent, pay your bills, control your debt, and save money, you should probably stick with renting until you earn a better salary and master the art of budgeting. A home purchase not only requires a hefty one-time down payment, but you’ll also need consistent cash flow to cover a long list of recurring costs. “It’s always smart to have sufficient earnings and savings to support the monthly mortgage payments, taxes, insurance, and utilities,” says Hartmann. Your current cash flow should be high enough that you can afford to set aside one to two percent of your home’s purchase price each year to cover regular maintenance. For example, a $200,000 home would require you to have $2,000 to $4,000 on hand each year for general upkeep of your house. Remember that this is on top of your mortgage, insurance, and tax payments!
If you have creeping credit card debt or other substantial loans, focus on paying these down before you venture into the housing market. Lenders will be more comfortable working with you and willing to offer a better mortgage rate if you have a good credit score.
What are your long-term career and life goals?
One of the advantages of renting is the freedom to move should you decide to change careers or enroll in grad school. Renting also frees up a little cash when you need to pay for tuition or adjust to an unexpected salary cut. Hartmann herself recently became a renter again after leaving the supply chain management industry for a real estate profession. “I moved to renting mostly because I was changing careers and needed to free capital to support that change,” she says. If you are pursuing your dream career or another degree, focus on those goals before you sink money into a new home.
You should also consider your relationship and family plans before purchasing a home. If marriage and children are on the horizon, owning a home is preferable if you can afford it, as a home can provide stability for your growing family. However, carefully weigh the pros and cons of purchasing a home with a boyfriend or girlfriend, as unexpected breakups can cause considerable emotional and financial strain.
How much time and energy do you have for home maintenance?
One of the biggest benefits of buying a house is the freedom to remodel and maintain your own space. However, you must be prepared to make certain sacrifices to carry out these duties. “You may have to cancel happy hour to mow the lawn while the weather holds out or stay home from the big ski trip so you can have your furnace repaired,” says Hartmann. If you don’t feel ready to take on these responsibilities just yet, leave them to a landlord while you set aside money for the day when you are ready to take care of your own place.
What are the costs of renting versus buying where you live?
Home prices and rental rates vary according to region and current market trends. To get a general idea of how rental rates compare to housing prices, look through the real estate or classified section of your local paper. You can also check out a site like rentbits.com that lists rental and housing prices by city. Enter these figures, as well as your projected down payment percentage, mortgage rate, and security deposit costs, into a rent vs. own calculator such as this one featured on Ginnie Mae.com. (To find more current property tax and appreciation rates for your state, see MSN Money.) This will give you a general idea of whether renting or buying is more affordable based on your local housing market and budget.
How long do you plan to stay in your first home?
Many consider home ownership a solid financial move because your money grows in the real estate market rather than in your landlord’s bank account. It’s true that jumping into the housing market is probably the largest and wisest investment you’ll ever make – as long as you don’t jump out of it too soon. “A house is not something you can liquidate quickly or easily if you want to move the capital into another investment or if you need to move somewhere else,” says Hartmann. “And historically the real estate market has been a very safe, solid investment option, but it's not guaranteed that you’ll make a profit.”
In fact, it could take decades for the housing market to turn in your favor, and in the meantime there’s a good possibility that renting would have saved you more money in the long run! Since there are no guarantees in the housing market, you should be at a point in your life where creating a permanent home is more important than making a profit. A new home is just as much of an emotional investment as it is a financial one, and you should plan on staying in your home for longer than you would typically rent an apartment – about three to five years. If you’re content with your career, love your current location, and can find a house that you’d be comfortable living in for the long haul, then you are probably ready to buy your own home.
Although you can’t predict the future, consider these five questions carefully before you navigate the housing market. In closing, Hartmann says, “My suggestion to anyone looking to buy would be to research as much as you can, talk to people who do own homes to get an honest feel for what it entails, and work with a good, reliable agent.”
By: Tanya Stanfield
1-10-2010
Tanya Rose Stanfield continues to navigate the post-college world in Chicago six years after graduating from the University of Wisconsin. She's a freelance writer and marketing communication expert who writes for athleticgals.com and keystoneclick.com.
