Renting vs. Buying a Home

At some point in your life, you will ask yourself the question, “Is it better to rent or to buy?” and the answer is almost always: “It depends on the state of housing and your circumstances.”

After 2008, when the U.S. economy bottomed out and the housing bubble burst, the standard belief that it’s always better to own, rather than rent, was turned on its head. When home values plummeted and many people found they were upside-down in their mortgages (owed more than the home was worth), the American dream of owning was shattered and renting was suddenly the desired living style.

That’s why the “Rent vs. Buy” question requires people to examine all the elements of the decision, since where we live is an emotional decision as well as an economic one. Here’s one way to break down the issues:

Pros of Renting  

• Lower cost upfront – As a renter, you will be required to pay first and last month’s rent and perhaps a security deposit for a pet. If you buy, you will be required to pay a hefty down payment, plus costs for the home inspection, closing costs and other potential items such as a survey and sewer scope. It’s a difference of a few thousand dollars if you rent compared with tens or even hundreds of thousands of dollars if you buy.    Freedom and flexibility – If you are new to the area, you can rent and use this time to check out neighborhoods to see where you might possibly want to buy. By renting you can test an area without committing to it. 
• Invest money elsewhere – You can take money that would normally be spent on a down payment and house costs and invest in the stock market or other investment opportunities that could get a better return on value, depending on location.
• Uncertainty in your career -- If you think you might need to move in the near future, or are mulling job changes where you could be relocated elsewhere in the country, renting affords the freedom to come and go as needed.
• Uncertainty in income – If you expect a pay hike or pay cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
• Time to establish credit – Got bad credit? By creating a history of on-time rental payments, it can help you build good credit that you would need to qualify for a mortgage.
• No maintenance – When the pipe leaks under the sink, you don't head to your nearest hardware store, you head for the telephone and call the landlord.
• Incidental expenses – Occasionally, the landlord might pick up costs for utilities such as water, sewer, garbage, and in some cases heat and hot water as well.

But there are downsides, too:

– You may have no control over the fluctuation of your rent.
– You might be limited in decorating the home or apartment.
– You won’t build equity in your home.
– You are subject to the landlord’s decisions.

Pros of Buying

• Build equity – When you pay rent, you don't own anything. When you pay a mortgage, you increase your degree of ownership in your home with every payment. Also, you can borrow against your ownership (or equity) in the home to pay for major purchases and you can refinance your home at favorable rates to help fund major purchases.
• Submit tax deductions – You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. Not only that, but if you meet certain requirements the IRS won't apply a "capital gains" tax on your profits from the sale of your home. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.
• Have creative control – You like dozens of pictures on the wall? Well, hammer away -- they are your walls now. Like the color mango? Go ahead and paint. Wish you had another room? Go ahead and add one.
• Maintenance choices – If you own a home, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a rental, you are at the mercy of the landlord when repairs are made and how.
• Pride of ownership – It might not make sense for everyone, but having a home you own is still the ultimate American Dream.

While a home can be a good investment – and let's face it, you have to live somewhere – many financial experts caution against purchasing a home simply as an investment. Also, keep in mind that the dynamics of real estate markets across the U.S. vary greatly. This reality requires each consumer to be fairly sophisticated not only in terms of their own finances, but about all the data for the market in which they are looking.

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any information provided does not constitute an offer or a solicitation to lend. Providing information to purchase does not guarantee a loan approval. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

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