For most people, buying a home is one of the biggest financial decisions of their lives. However, buying a home has several consequences, most of which cost a pretty penny. There are more factors at work than just whether you can afford to buy a house. Is buying the best choice for you? It’s important to be aware of some of the pros and cons of renting and buying.
Several factors are at play here: your finances, future plans, the real estate market, interest rates, and so on.
Buying Vs Renting
Many people have had success investing in a home – and because of that they tend to assume buying is an obvious investment for everyone else, which isn’t always the case. Unfortunately, past performance isn’t always a good indicator of performance in the near-future, and you should be cautious if buying would push your finances to the limit. Another thing to be aware of is PMI – an additional amount you’ll have to pay monthly if you don’t have a big enough down payment.
Generally, it seems to be a financially sound decision to buy if you plan on living in that house for 5-10 years. Depending on markets, it is possible for it to be less or more, but a good minimum is 5 years. This means that if you’re young and planning to relocate for your career or personal reasons, it may be best to postpone purchasing a house.
Before you buy, make sure you can cover all expenses associated with owning a home. Almost everyone I know has encountered unexpected issues after moving into a home they purchased. Some of these are minor and can be easily fixed, and others can destroy emergency savings!
On top of that, there is usually a long list of furniture, decorations, landscaping equipment, and other things that need to be bought shortly after you move in. Renting may be a great option if you don’t want to stay in the same place for a minimum of 5 years, or you aren’t financially ready for a mortgage, a large down payment, AND possible unexpected expenses, or if you don’t want to deal with the responsibilities that come with home ownership.
A common trend is to buy a house and then move every 5-10 years and rent out the previous property. I’m a fan of this strategy, and have seen it work out wonderfully many times, but you need to be able to afford multiple mortgages (albeit temporarily) during periods you don’t have a tenant. Also, if the plan is to rent out a house in the future, you must be selective about which houses you purchase – what you want and what the average renter wants may be completely different.
Renting Pros
- More freedom to move
- Maintenance is not your responsibility
- No miscellaneous fees like closing costs
- Fewer unexpected expenses
- Ability to try out different living environments
Renting Cons
- No equity built
- Rent may go up
- Customization may be limited, especially for yards
- No guarantee/stability for long-term residence
Buying Pros
- Equity is built
- Home value generally increases
- Potential tax advantages
- Customization only limited by HOA (if there is one)
- Long-term stability
Buying Cons
- Responsible for maintenance and repairs – can cost a lot of money and time
- Not as easy to pick up and move
- Potential miscellaneous fees like closing costs & property taxes
- It is always possible for the home value to decrease or even plummet
You’ll Need To Consider A Lot Of Major Issues
There are a lot of things to consider, so make sure you ask yourself the important questions!
1. How Long Do You Plan On Living In The Area?
More specifically, are you staying put and settling down, or do you still need some flexibility? If you plan on staying in the same place for at least five years, buying can make a lot of sense – if your finances are in the spot where you’re able. However, renting generally makes a lot more sense if you’re only planning to stay for a few years. It’s important to be honest with yourself about where you are financially and where you want to live in the future.
Look at your current personal situation and try to determine if it may change significantly over the next couple of years. If it probably will, try to factor that into your decision-making process. For example, if you plan on getting married soon it would probably be best to wait and make the decision with your soon-to-be spouse before purchasing a home. Likewise, if you think you’ll have kids soon, you’ll probably want to make sure you have enough space to accommodate children – as well as a stable environment.
2. What Is The Relative Cost Of Renting And Buying In Your Location?
Markets can fluctuate and favor renting or buying over the other. While buying generally looks better in the long run, if you live in an area where the houses for sale are prohibitively expensive, renting a cheap apartment could be the best option.
Remember, renting a cheaper place in the short-term can help you save up enough to buy a nice house later!
3. Can You Afford The Additional Costs And Responsibilities Of Home Ownership?
There can be a lot of risks when owning your own home, even with all of the potential positives. Closing costs are expensive, the market can plummet, renovations may be required, and general repairs can set you back a pretty penny. It is your responsibility to keep up with appliances, air filters, fire alarms, landscaping/gardening, plumbing, and a multitude of other potential expenses.
If your finances and time are already being pushed, it is probably better to wait on home ownership until you can handle all additional costs and responsibilities that come with it.
I understand the desire to own your own home, but don’t forget to be realistic about your current financial situation. If you’ve gotten some estimations and found that it’d likely be cheaper to buy a house, consider whether you can afford the upfront costs, even if it is cheaper for you over the long run. If you can’t, just save up for a while, until the upfront costs are no longer an issue.
Conclusion
I recommend using a couple different mortgage calculators to get a decent estimation. Make a mock budget and see if you can afford a similar lifestyle, or if you would have to cut back on anything.
There is no one-size-fits-all solution for renting and buying. Your current needs and finances are your own, and they may change drastically over just a few years. Whatever decision you make, it’s of the utmost importance that you educate yourself as much as possible and stay realistic about your finances and needs.
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