rent-or-buy - Zacchaeus Financial Counseling, Inc.

rent-or-buy

Is It Better to Rent or Buy?
Answer: It Depends.

Article by R. Joseph Ritter, Jr. CFP® EA

Whether you are moving to a new area, starting out or starting over, the question that commonly arises is whether to rent a home or buy a home. There are distinct advantages and disadvantages to both, so let’s take a look at some areas that can serve you well or trip you up.

First, let me tell you a story about my own experience. As a young family just starting out, my wife, infant son and I relocated to a new area for a new job. A few people wiser than me suggested we rent for awhile to decide if we liked the area and the job. My mind was set on owning a home and establishing ourselves. Turns out that I did not stay in the job or the area as long as I anticipated, and we found ourselves moving less than 2 years later.

We thought we had bought a home in a good area, but we overpaid for the home. Unfortunately, we did not know what home prices should be and did not push our realtor for a lower price. The house sat vacant on the market for about 8 months, while we had already moved away and were paying rent on another house. On a small income, the two house payments took their toll on our finances very quickly. We ended up renting the home, but the income barely met expenses. The tenants eventually had to be evicted for non-payment of rent, which further stressed our finances.

It took about 5 years for the house to finally sell, all because we made a decision not to rent.

That’s not to say buying a house is always the wrong decision.

Should I rent?

Advantages

  • Major repairs are someone else’s problem
  • Moving out is easy
  • Rent can be negotiable
  • Taxes and insurance are paid by someone else
  • Walk away if the home is damaged or destroyed
  • No large downpayment
  • No need to shop for realtors
  • No need to worry about market swings

Disadvantages

  • Doesn’t build equity
  • Can’t make major changes to the home to suit your taste
  • Landlord may not respond to repairs quickly
  • Landlord may not renew the lease or sell the house
  • Rent can be raised, making the house unaffordable

Should I Buy?

Advantages

  • Builds equity
  • Sell in a high market to take advantage of rising values
  • You can modify the home to your taste
  • There may be more of a selection available
  • You can negotiate price and control the amount of your monthly payments
  • Comfort and enjoyment of owning your home
  • You can own it outright and not make any payments

Disadvantages

  • You can move out anytime, but it might not sell immediately
  • You pay for all maintenance, upkeep and major repairs
  • Taxes and insurance are your responsibility
  • You can lose a lot of money if the market goes down
  • Risk of foreclosure
  • Saving a large downpayment
  • Continuing to make payments even if the house is uninhabitable when it’s damaged

So, which is right for you and when is it appropriate? Typically, you should buy a home only if you plan to stay in it for a longer period of time. Five years or more is a good rule of thumb. Why five years? Buying a home can be expensive. Recovering your expenses is not easy if you buy and sell in a short period of time. Also, market swings can take about five years to settle. If you buy a home and the market falls shortly after that, you don’t want to be boxed into selling. You want to be able to wait out the slump.

Renting is certainly advantageous for waiting out extreme market swings and for learning a new area. When you move into a new town, it might not always be obvious where you want to live or which neighborhood is the best fit for your family and will provide good resale value. Renting allows you some flexibility and gives you time to house hunt. In my area, when the real estate market was at its peak, renting was a much more affordable option for many families. Rent prices did not swing wildly like home prices.

Depending on your stage in life and your financial goals, renting can be a very attractive alternative to buying.

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