Written by: Olivia Forgette
Part of the stereotypical “American Dream” is a quintessential white picket fence home in a quaint community. In the current housing market sphere, this dream can feel out of reach for many Americans. Although largely a financial decision, there are other aspects to consider. We are here to help explain renting vs. buying and the pros and cons of each option.
If you’re interested in making a move in the real estate space, please reach out to Maureen Forgette for professional support and guidance.
Basics
The key basic takeaways on the topic of buying versus renting include:
• The decision to buy is clearly financial; but one you should make considering your future lifestyle and goals (AKA forward-thinking is a key factor in your choice to rent or buy)
• Renting is more flexible, and overall cheaper upfront
• Buying offers more opportunity to build wealth via home equity and tax benefits
• Both options provide you with a place to call home, and require regular monthly income
• Owning property requires more responsibility, but offers stability
• Purchasing a home allows for potential equity that can help with additional real estate purchases in your future
Benefits of renting
Renting a home isn’t something to be ashamed of, in fact, the average homeowner in the United States rented for around five years before making their first real estate purchase. The average first-time homebuyer in the U.S. is 29-years-old, making the average moveout age 24-years-old.
Renting offers some benefits that may seem appealing, especially to the younger demographic. These benefits include the flexibility to move around more frequently, and a fixed monthly payment (free from repair surprises). Plus, your upfront costs tend to be lower than purchasing a home.
As a renter, you have less worry regarding home values decreasing. There also are no worries regarding paying property taxes or surprise tax increases. Renter’s insurance is also often less expensive than the homeowner counterpart.
A negative to renting that should be considered is knowing that your landlord is in control. The landlord has the right to raise your monthly rental fee, or even sell the property when you’re not expecting it. Another issue with renting is rental rates for single-family residences are increasing at a quicker rate than the rates for multi-family properties, according to Zillow’s housing predictions.
Although renting doesn’t build equity, this way of living is sometimes more cost-friendly and offers flexibility that may be interesting as you are attempting to figure out your goals and lifestyle plans for the future.
Cons of renting
• Landlord could raise your rent or decide to sell the property
• Building equity for your landlord, instead of for yourself
• No tax benefits
• Less freedom in home design choices
Benefits of buying
Homeownership brings many benefits. Pride, control, stability, and financial opportunity.
The key benefits to buying are clear. You have an opportunity to gain home equity, which means the ability to increase your financial stake by owning your property. Equity is gained in two ways, first is by paying down your mortgage balance, and the second is by the housing market making your home value increase over time.
You can also count on predictability in your cost of living when you own a home. Yes, owning comes with additional fees relating to home maintenance, but your mortgage payment will likely remain stable the entire time you live in the home; whereas rent prices historically increase year-over-year.
An additional clear benefit to buying a home is the often-larger opportunity available to you. You will have access to more variety in neighborhoods, home styles, and amenities to ensure your property is a place you’re proud to call home. Generally, across the U.S., single-family rentals are much more limited in availability.
There are also tax benefits to owning a home versus renting. Homeowners who itemize their tax returns can write-off mortgage interest paid on mortgages of up to $750,000. Also, when you sell your property there are additional tax benefits including avoiding paying capital gains tax on up to $500,000. If you have any additional tax benefit questions regarding owning a home, speak with a licensed tax professional.
Cons of buying
• Requires substantial money upfront
• Risk of losing money if home values decrease
• Extra expenses related to home maintenance
• Insurance can be more expensive than renting (especially if the home requires additional flood coverage)
Ready to buy
There are some key factors to consider when deciding if you are ready to purchase a home. You should understand your:
• Income (this should be stable and sufficient)
• Down payment (which could be as little as 3.5% of the purchase price)
• Credit score (having a lower credit score can affect your ability to qualify for a mortgage or a favorable rate)
• Other debts (a general guideline is your monthly debt payments should not exceed 36-percent of your pre-taxable income)
Which is a better option?
The truth is, there is no definitive answer as to which option is better. The topic of renting vs. buying a home is largely situational and individual. There are many variables that go into your personal decision to dive into the housing market. Your financial security and long-term financial strategies, your lifestyle, and your goals are all factors to consider when making the decision that is best for you.
There are benefits and risks with each choice. Making an informed decision to see if you are ready to become a homeowner is the key to your real estate success in the future.
