Are you feeling undecided about whether to continue renting or buy a home? Well, the decision on homeownership is critical and one you have to make at some point in your life. The debate on which is better, rent vs buy is unending with everybody you ask. Before you feel too overwhelmed, you would benefit from weighing the pros and cons of each option and make an informed decision.
Factors Determining the Rent vs Buy Decision
Home location and disposable income are highly influential when weighing the rent vs buy decision. Most of the time, you’ll see people buying homes when they’re better off renting because they view homeownership as an investment. Likewise, people rent all the time due to the flexibility the option offers. This is even though they’d amass colossal wealth over time if they bought a house.
Towards that end, various facts influence the rent vs buy decision as discussed below.
- Monthly budget- evaluate how much of your monthly income you can comfortably spend. Do this by calculating your total income from all your various hustles. Deduct essentials bills such as food, transport, and emergency cash. You can comfortably spend the reminder on housing. As a rule of thumb, apply the 50/30/20 budget rule.
- Stability vs. flexibility- homeownership comes with a lot of security and a sense of belonging. Before you decide to buy, you need to figure out how long you plan to stay in an area. If you plan to stay in an area for a long time, then it makes sense to buy than rent, but if you have various workstations, you may be better off renting.
- Financial impact and flexibility- expert financial planners recommend using a rent vs buy ratio analysis. In this case, divide the price of your desired home with the annual rent of a similar rental apartment. If the ratio is below 20%, it makes more sense to buy than rent.
- Buying options- buying a home has serious financial implications. As such, there’re different payment options, and you should choose one that favors your financial situation.
Financial Differences between Buying and Renting and a Home
The rent vs buy decision affects your lifestyle, your monthly savings as well as your cumulative savings over the years. Failure to consider the long-term effects of their choices leads to people buying when they’d be better off renting and vice-versa. Below are the major pros and cons of each option to help you make an informed decision.
Advantages of Renting
The decision to rent and the location depends on your financial situation and the desired lifestyle. Renting offers numerous benefits which include:
- Monthly payments are lower than home buying monthly installments. At times, the rent covers utility costs, adding to your total savings.
- It’s the best option if your job demands that you move a lot. As a tenant, you have no long-term commitment, hence desirable if you have no intention of staying in an area for a long time.
- The landlord is responsible for all home maintenance. The only insurance cost you incur as a tenant is a cover on your items.
Disadvantages of Renting
- Regardless of the above benefits, renting has its share of drawbacks which include:
Renting offers no tax break, meaning that you can’t claim mortgage interest deductions or property taxes when filing returns.
- The monthly rent isn’t fixed and can increase depending on how the landlord sees fit.
- As a tenant, you’re bound by the lease agreement. That means you have no freedom to renovate the house to meet your needs without the consent of the landlord.
- Renting offers no long term wealth creation since the ownership of the property will never shift from landlord to tenant. Instead, you continue paying towards the homeowner’s loan or mortgage.
- You have no guarantee that the landlord will renew the lease after the initial one expires.
Benefits of Buying a Home
Homeownership is viewed as a costly venture, given the hefty upfront costs. However, if you look at the long-term financial benefits, you’ll see that it’s better than renting. Some of these advantages include:
- You can increase the value of your home through proper home maintenance practices. As such, you’ll make a profit if you decide to sell your home in the future.
- You can claim tax deductions for your mortgage payment interest. This helps you to save more money in the long run.
- Homeownership as long-term befits in terms of a sense of ownership, security, potential personal wealth accumulation, and equity.
- Owning a house gives you the freedom to renovate or upgrade the house as you wish, unlike staying in a rental home where you need the landlords’ permission. For instance, you can alter the paint color, interior decor, and landscapes to match your preferred style.
- You can buy a home and then rent it out to generate more income. You can put the revenue towards mortgage or loan repayment. Similarly, this enables you to make repayments on time, hence improve your credit score.
Cons of Home Ownership
Even with the above benefits, you need to be ready for homeownership drawbacks which include:
- Substantial financial responsibility in terms of mortgage repayments and regular home maintenance.
- You’re less mobile than a tenant, mainly if you rely on selling your home to buy a new one.
It would be best if you gave careful thought when weighing between rent vs buy. Don’t lean too much on what unqualified people tell you. Instead, focus on whether the choice you make gives you comfort and fits in your vision for the future. If you decide to buy a home, be sure to get a free consultation from Transition Realty to ensure you get the value for your money.
About Transition Realty
Transition Realty owner Steve Lehmeyer specializes in helping people manage real estate transactions in the Minneapolis/St. Paul area. His experience in the Minnesota real estate market spans 20 years. Steve and his team work with clients to buy & sell single-family homes, townhouses, condos, lake homes, and investment property. Download a free home search app for your smartphone or search the MLS at TransitionRealty.com.