Rent vs. Buy

Are you a renter who is thinking of buying a home?  It is the great American dream, but many renters don't really understand the potential impact on their lifestyle and finances.  Buying a house isn't for everyone, but it can be the most rewarding purchase you ever make.  From the renter's perspective, home ownership can look like a great opportunity.  But there are many things to consider before making the decision to buy.

First of all, do you have the money it takes to purchase a home.  It's not just about having a down payment, in fact you may be able to qualify for 100% financing.  Moreover, you will need to consider all the other costs associated with purchacing a home including the closing cost needed up front, monthly payments, insurance, taxes, repairs and any upgrades you may need to make.

Housing costs can be divided into shelter costs (putting a roof over your head) and investment costs (building equity). When you rent, you pay your shelter costs, and the landlord pays the investment costs.  When you buy, you pay both, which is usually more.  Ten years later when you sell the house, you may find that your investment did well and you saved a lot of money by buying; but on a month-to-month basis, you can count on spending more money to purchase a home.

A house can be a great investment, but like any investment, there is risk.  Insurance helps you manage risks like fire, earthquakes and thefts, and a home warranty plan can help to keep the cost of major repairs in check, but there is not a lot that you can do if the neighborhood property values level off or begin to fall.

For most renters, buying a house means moving to a smaller house and perhaps to a cheaper neighborhood.  You will almost certainly take a lifestyle hit.  The life of a renter can be quite extravagant, and you may find that it will be hard to take pride in the bungalow that you will be able to buy.

Buying a house is an investment, and for many people it is a good one. But, is it a good investment for you?  If you own a house for only a short period of time, you probably won't recoup the high costs of buying and selling it.  Time is generally the most influential factor in the rent vs. buy decision.  Unless you live in an area where property prices are rocketing upward, it generally does not make sense to buy a house if you can't commit to owning it for at least four years.

One of the greatest joys of ownership for many people is setting down roots.  When you buy a house, you have your own land, your own house and a sense of becoming part of a community; meeting and sharing with your neighbors, getting involved in local issues, maybe even running for city council.

This lifestyle can be very attractive, especially if you have children who will enjoy the stability a home can provide.  But buying a house means you will have much less money available to invest, or for cool trips on the weekend. Instead you could be mowing the lawn, cleaning the gutters, or painting the kitchen.  If you don't have enough cash, there are alternatives, the first of which is that you rent for now and start saving money so you can afford to buy later. Most lenders offer several programs to help buyers get loans with small down payments.  You may even be able to qualify for a mortgage with no down payment.  Or perhaps your parents, or other family members can provide you with the money needed to cover the cost associated with making your purchase?

You can expect that your initial mortgage payments will be higher than your current rental costs.  However, there are factors that make the decision to buy less painful including tax savings and other factors including building equity that offset the additional monthly expense.

Buying a home should be looked at as a long-term investment since you make a large up-front cost and it can take years to get a good return.  For example, the transaction fees of buying and selling a property can add up to roughly 10 percent of the selling price.  It takes a lot of appreciation to make up for these transaction costs.

Residential real estate is considered a solid, not spectacular, performer in most markets.  Mostly because the supply can often respond quickly to increases in demand, and the main risk of oversupply happens only on a local economic level and is usually temporary.  You need to figure out where you fall on the risk curve and then look at the return on investments at that risk level.

To find out more about the positive aspects of home ownership and if you qualify to make the transition from a renter to a homeowner, contact Debi and I today.  We would be more than happy to provide you with a free consultation to see if you are a candidate to purchase a home, you may also click here for buy vs. rent homeownership calculators.

Chris Styner