The time comes when you have to decide to buy or rent a home. Your impulses will likely push you towards buying: nothing is more comforting than the thought of living under the safety of your own roof, free from landlords, monthly rent payments, and other limitations.
Unfortunately, owning a house is involving. In addition, houses are expensive. You need to pay large sums of money at once. Most of us cannot afford such costs.
A mortgage is a bridge between the dream of owning a home and the reality of having it.
But mortgages come with several drawbacks the biggest of which is interest. For example, a $300,000 home may cost you another $300,000 in interest.
With this in mind, is renting a better option? Or do you still save if you take a mortgage?
These questions are difficult to answer, because what’s true in one scenario may be false in another.
In your twenties is when the dilemma of buying vs. renting will first hit you. This period represents the most productive age. It’s also the period with the least responsibilities. So buying a home may seem attractive. But like I said, renting may prove to be the better option in some instances.
Read on to discover whether you must take a mortgage or rent.
Buying vs. Renting
Stuck with choosing between paying for your own house or someone’s? Then here are the factors that will help you make a choice.
The cost of a house has a huge impact on whether to buy or rent. Your disposable income dictates both of these choices. If you are an expense conscious individual, renting is usually attractive.
Buying a house piles up several costs you need to deal with upfront, and these can be in thousands of dollars. For example, getting a mortgage means you must make a down payment, which can range from 3.5-20 percent of the house cost. Knowing how expensive houses are, this amount burdens most new homeowners.
Apart from the down payment, you also need earnest money (paid to show your seriousness), home appraisal fee (usually between $300 and $500), and several other costs. You also have to recompense the tax amount the seller might have paid in advance. Furthermore, you must pay for homeowner’s insurance, which is required by lenders.
Here is a video by Re Max detailing expected costs when buying a house:
You need to meet all these expenses during the buying process. Research shows they can amount to1.5 times your down payment.
And the costs don’t stop yet. Once you buy the house, a portion of your check will go towards your mortgage. This will go on for 15, 20, or even 30 years. Other recurring costs include taxes, insurance, and maintenance.
Renting, on the other hand, eliminates most of these costs from your plate. You are only required to make a security deposit and pay your first month’s rent when moving into a new house. After that, you only need to worry about monthly rent payments.
If things get broken on rented property, you won’t be responsible for that. Simply call your landlord and your work is done. You don’t need to pay taxes, down payments, or homeowners insurance.
So if you’re after cost saving, renting wins, particularly in the beginning.
Among the many ways you can build wealth, real estate has been seen as a viable option. Research shows that with time, real estate appreciates. For example, if you bought a $150,000 home 10 years ago, it would be worth $300,000 today. From 1978-2004, real estate has had an average return of 8.6%.
Even better, when you own a home, you are free to ameliorate it, increasing its appeal and value. A good many people have made fortunes from real estate flipping.
Real estate investing, even on a small scale, remains a tried and true means of building an individual's cash flow and wealth.
Renting kills any chances of building equity. You can rent a house for over 30 years. But that won’t make it yours. Even if you improve it, you will do it to the benefit of the landlord.
However, you must not ignore reality. Real estate markets fail sometimes. Take the story of Ricardo and Denise Cabrea. The couple bought a $490,000 home in 2005. Owing to the 2006 real estate bubble, the house lost $150,000 in value by 2009.
But the good news is that in the long term, real estate usually appreciates. So even though you may face losses here and there, chances are you will still come out a winner the longer you hold on to your property.
Owning a home gives you an opportunity to earn money from….
Yep, you guessed it right:
You live in another house that’s smaller and cheaper, suiting your requirements. And you rent the bigger house that you possess.
Else, you can also rent one or two rooms in the house you purchased.
The rent income may contribute towards your mortgage, tax, or homeowners insurance.
Renting, on the contrary, means you are the one giving away money. In other words, you are helping your landlord pay his or her mortgage. But even if this is so, remember that having a roof over your head will always cost money.
Caveat: Renting comes with high maintenance costs for landlords than if they live in the house themselves. That’s because renters are not usually as careful as an owner would be.
If you’re a freedom loving person, then renting is a better choice for you. Because you’ll have the mobility to travel to any location. For homeowners, the story is different. They just can’t pack up and leave. What about the house they have spent years paying for?
They either have to sell or rent it. Both these options can be long processes that need serious thinking. And if you are materialistic individual, you’ll carry luggage that becomes a hassle to carry.
The price of rent has continually risen. So if you choose to rent, know that your expenses will keep on growing. Worsening things, landlords can willfully raise the rent at any time they wish.
Of course, you can always relocate to less expensive neighborhoods. But constantly moving around is a lot of work.
Homeowners with a fixed-rate mortgage don’t have to worry about uncertain house prices. They will pay the same amount until they finish their mortgage. After this, the only costs remaining on their plates will be small ones (tax, insurance, etc.).
With renting, the landlord can evict you at any time, usually with only a 30 or 60 days’ notice. If you had become fond of the house, it could become a problem.
Some landlords also impose restrictions. They may bar you from smoking, drinking alcohol, or keeping pets. They may also limit the number of guests you can have at a time. When living on your own property, you don’t have to worry about any such limitations. You can do anything you want as long as the laws allow it.
When deciding whether to buy or rent, many only consider financial factors. However, this is a mistake. There are lots of other things apart from the cost that can help narrow your decision. Ignoring these things can lead to costly mistakes.
You should first think of time.
How long are you going to stay in one location?
The longer the period, the better it is to buy. A study by Trulia showed that:
● For families who move every 7 years and can afford up to 20% in down payment, buying is 37% cheaper than renting.
● The study further said that low mortgage rates usually offset high renting rates.
Another thing to consider is your goals. Where do you see yourself in 20 or 30 years?
Do you see yourself getting married and raising your kids in a certain area? Or do you see yourself settling in an area doing business? If “yes” in both scenarios, then buying may prove to be wise.
But if you know you will be moving a lot:
You may be better off renting.
You also need to seek the opinion of family members if you don’t live alone. This is especially important for couples.
However, this one fact about twenty someones might nudge you for renting against buying...
In your twenties, there are a lot of gaps that need to be filled in your life. You may get a new job at a different place from your existing neighbourhood. So buying a house will put you in an awkward spot.
A study by LinkedIn found that young people usually change about 4 jobs before they are 32. Further, the changes involve unrelated industries.
A study by LinkedIn found that young people usually change about 4 jobs before they are 32.
Another reason to rent has to do with your knowledge of a neighborhood. Unless you know it well, rushing to buy may prove to be stupid. 3 or 5 years after buying, you may start to hate that area.
But the biggest reason to rent has to do with money. Most young people do not have enough to afford down payment and other costs necessary to close a house sale.
Data from the U.S Census Bureau shows that house ownership fell among millennials. It was 35.8% in 2015, but 39% in 1995. Some of the theories for this include the high cost of down payment and monthly mortgage payments, which leave most young people with less disposable income. It’s also worth noting that unemployment stands at 8% and there is a whopping $1 trillion in student debt.
So for many of you, renting is usually not an option, but a necessity. If you force yourself into a mortgage when you can’t afford it, you will stretch your wallet too far. Your disposable income will fall significantly and you will diet your spending to starvation.
If you want a house for building equity, you still have other options which provide better returns even if you have limited income. In a study by Jack Clark Francis and Roger G. Ibbotson, it was discovered that paper investments, which include stocks, futures, and bonds, give better results than real estate. This study analyzed these two forms of investments from 1978-2004.
The recommendation of paper investments centers on your ability to commit any savings from rent into the already mentioned paper investments. You will emerge a winner than those who buy houses.
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
Unfortunately, channeling rent savings into paper investments is easier said than done. Most young people are inclined to use any extra income for other purposes. A survey by Harris Poll showed that 80% of millennials haven’t invested in the stock market. 40% claim they do not have enough money for stocks. 34% said they don’t understand how the stock market works. And 13% attributed their failure to invest to student debt.
A survey by Harris Poll showed that 80% of millennials haven’t invested in the stock market.
However, as research has shown, waiting even as little as 10 years can have a big impact on your wealth. Consider the case of these fictional twins, John and Mary. John invests $10,000 when he is 25 and adds $100 to his investment every month. Mary waits until she is 35 to start investing. She also invests $10,000 at the start and adds $100 to her investment every month.
At 55, here is how wealth they will both be (calculated at a 6% “rate of return on investment” using bankrate.com):
At 55, John will have $155,360.33 while Mary will have $77,635.79, a difference of $77,724.54. As you can see, if you decide to invest in paper investments instead of buying a house, it is crucial that you start right away. The best part is that there are no set amounts as to how much you must invest.
While buying house is usually a wise and satisfactory idea, it is not the only best option. As you have seen in this article, renting may prove better than a mortgage. While owning a house gives security, wealth, and a lot of other good things, you can still enjoy all those benefits with renting. Just know that they will come in different forms.
With that, what’s your take on buying and renting? Which do you believe would be the best option in your case?