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Is it Better to Buy or Rent a House?
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Is it Better to Buy or Rent a House?Deciding whether to buy or rent a home is one of the most important decisions a person can make. It is a decision that involves many variables, including the financial goals and lifestyle of each person. Because there are so many variables, and because so much money is at stake, it can be one of the most difficult decisions in life.
Lifestyle VariablesThe American job market is competitive and rapidly changing. An employer can face financial difficulties and decide to lay-off employees, forcing them to look for work elsewhere. New technologies emerge and make old jobs obsolete. And people today often get tired of working in the same job for very long. In many cases, these professional changes can require a person to uproot from one city and move to another.
Owning a home can make it harder to adapt rapidly to fluctuations in the job market. Depending on the housing market, it might take a long time to sell a home even though the owner might need to immediately relocate for professional reasons. Someone who rents a home, however, will have more freedom to move as needed.
Also, young people who aren’t married often prefer renting a house or apartment because they are still in the process of defining their professional and family goals. A single person usually wants to wait until they are married before buying a house, so that both husband and wife can participate in choosing the style of house and the neighborhood they want to live in. Some elderly people like to rent apartments in retirement complexes that provide services such as gardening, snow removal, maintenance, transportation and social activities.
However, some people feel strongly about owning property. It can be greatly satisfying to own a home, to do landscaping and decorating according to one’s personal tastes, to feel the independence and security of having a piece of land that is yours. It’s known that people who own homes are typically more involved in their communities and schools than renters (although this is not universal). A renter, by contrast, will usually feel that they are always in a temporary situation, without much control over the place they call home.
Financial VariablesBuying a home can bring many financial benefits, but there is no guarantee that it will be a good long-term financial investment. Many homeowners in years past watched the value of their homes skyrocket. This spurred them on to buy additional houses as investments. But in recent years, everything has collapsed. Now the value of houses across the U.S. has plummeted. As with any other investment, real estate has no guarantees.
One of the financial benefits of owning a home is that you will gain a tax deduction from the U.S. government. Over the years you will also build home equity—a way of storing wealt that can one day be used for other financial needs. Owning a home, if you pay your loan completely, puts you in a secure financial situation; even in the worst economy, a person who owns a house free and clear will always have shelter. No one can take that from you (barring a war or tyrannical government).
By contrast, a person who rents will always be sending hard-earned dollars into the hands of another person. They will never build equity in their own home. They money spent on rent will never come back to a renter. Although the renter will be helping to pay the owner’s property taxes, the renter will not be able to deduct these costs on his or her income taxes each year. And the cost of rent can increase every year, even if your salary doesn’t increase. Moreover, it’s possible for the landlord to force you to move before you are ready.
Financial Factors to ConsiderIf we exclude the lifestyle variables from the equation, which is more financially beneficial over time: renting or buying a home?
Assuming that a renter and a buyer are interested in the same home, the primary variables involved in making this determination are:
Usually the U.S. economy is fairly stable. If we assume that rent prices increase at a rate of three percent a year (about the same rate as inflation), and that home prices increase at the same rate, a person who rents a home would be in an advantageous position over a home buyer for about six years. But after that six-year period, the person who owns a home would begin to gain financial benefits that far surpass the renter’s benefits.
Obviously these two variables—time, rent increases, and home appreciation rates—aren’t the only factors that must be considered. Interest rates on home loans and the number of years required to pay off a mortgage also play a role. But in general, these two variables must be considered when making a decision as whether to buy or rent.
In the present-day economy, with home prices at record lows, the time could be good for both those who would like to buy a home. But if you are interested buying a home only as an investment, rather than just a place to live, you should remember that there is no guarantee that home prices won’t drop even more.
As you weigh these factors, it is always helpful and wise to talk with an independent financial planner about your options.
Author: Glenn McMahan
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