The American Dream makes us think we have to buy a home or we aren’t living life the right way. Is that the case, though? Today many people choose to rent (or are forced to do so), and is it really all that bad? Both buying and renting have their pros and cons.
We help you understand both sides below.
The Long-Term Commitment of Buying
Buying can help you make money on your investment, but it’s a long-term investment. Do you know what you will be doing in five years? Do you see yourself living in the same place? Does commitment scare you? If you can’t say what you’ll do tomorrow, let alone a few years from now, renting may be the better option.
That’s not to say that you can’t buy and sell in a year or two. It’s possible, but does it make sense? The first year or so of mortgage payments covers mostly interest. You won’t pay the principal balance down much. Unless your home appreciates like crazy (which isn’t likely), you won’t see a return on your investment. In fact, you’ll probably lose money after paying all of the closing costs and interest. Instead, you could rent while you figure things out.
If you plan to stay, though, buying can be beneficial. Yes, you pay interest on the money you borrow, but you eventually pay the principal down too. Your home will also likely appreciate, giving you a decent return on your investment when you decide to sell years down the road.
Paying for Maintenance
When you rent, you don’t have to pay for most maintenance and repairs. You pick up the phone and call the landlord. It’s his or her responsibility to fix the issues. All you have to worry about is paying the rent on time.
If you buy a home, the maintenance and repairs fall on you. The only exception is if you buy a condominium. You are then only responsible for the repairs and maintenance inside your unit. Anything that goes wrong on the exterior becomes the association’s responsibility.
As a general rule, estimate 1% to 2% of your home’s value for maintenance costs. A $150,000 home would need between $1,500 and $3,000 for maintenance and repairs annually. Is this something that fits in your budget? Do you want the responsibility? These are things you should consider.
Paying for Utilities
Don’t forget, your financial responsibilities don’t end with the mortgage. When you own a home, you have to pay to keep it running. This includes water, gas, and electricity. Can you afford the utility bills on top of the mortgage and maintenance costs? Don’t forget you still need food, clothes, transportation, and disposable cash for daily living.
When you rent, sometimes the utilities are included in the cost of renting. This varies by landlord and location, though, so don’t assume – always ask. Whether you rent or buy, always ask the current owner about the average cost of the utilities. This will give you an idea of how much it may cost you to keep the house running. This may help you make a decision.
Do You Have Diversified Investments?
It’s not a good idea to keep all of your money in one investment. This is true whether we are talking about the stock market, real estate, or any other investment. You should always diversify. If buying a home will wipe out any money you had for other investments, you may want to wait to buy a home. Diversifying funds into stocks, bonds, retirement accounts, and a home gives you a better chance at financial security.
If in the meantime, you have to rent, it’s okay. Renting gives you a place to live while allowing you to save money for your goals. Whether you save to buy a house down the road or you keep renting and invest your money elsewhere is a personal decision.
There isn’t a one-size-fits-all answer to whether renting or buying is better. They are both solid options depending on your situation. Talk with your financial advisor to decide what’s right for you. If you are ever in doubt, renting until you are sure of your decision is the best way to avoid a financial pitfall.