Renting vs Buying (Video)

Are you wondering whether you should buy a home or rent a little longer?

In this quick guide we’ll compare the pros and cons of buying and renting to help you figure out what’s best for you right now. 

Let’s start off with the pros of renting a home.

Flexibility

Renting a home gives you a lot of flexibility. Maybe the course of your career is not completely certain or you’re not sure if you will stay in this area long enough. In this case, renting makes it easy to move on.

Selling a home can be a lot of work if you have to move because of career changes or other circumstances. So if you still need to figure out where the future will take you, renting might be the better option.

Maintenance

Another great aspect of renting is that you can pass all your repairs and damages straight on to the landlord. If the pipes are leaking or the A/C motor breaks, all you have to do is call your landlord.

However, whether this is a pro or a con depends.

If you have a bad landlord it could take days or weeks until repairs are done. So if you live in Florida and the A/C unit breaks or you live up north and the heater breaks you might suffer some very miserable days if you have a bad landlord.

Explore the Neighborhood

If you are seriously considering to buy a home but you don’t know the area, renting a home for a little while could be a great opportunity to explore the area. 

There might be things about a neighborhood that could really bother you but that you wouldn’t notice until you lived there for a while. 

If you find something you don’t like, it’s easy to move on when you’re renting a home.

Building Credit

Finally it’s a great opportunity to increase your credit score. 

Making rental payments on time and paying off credit card bills in a timely matter can help you raise your credit score fairly quickly.

While with a 10% down payment you may be able to get a loan with a credit score as low 500 you may simply not qualify for a loan at this time.

A better credit score will make it easier to qualify for a mortgage and can substantially lower your interest rate.

Equity

And the biggest benefit of buying a home over renting is that you build equity.

When you rent a home, all expenses including the landlord’s mortgage payments plus a profit are passed on to you through the rent.

When you buy a home you will only pay for your own mortgage and your own equity instead of the landlord’s. 

Once you reach a certain loan-to-value ratio for your home, you can even borrow money against your equity. That means you could use the equity in your home to buy investment properties and rent them out for additional income. Or you could simply buy a new car or take a trip around the world.

Tax Benefits

In addition to building equity you may be able to save on on your taxes. Many states offer homestead exemptions, for example up to $75,000. In this example you would only pay taxes for half your home if your home was worth $150,000.

You may also be able to deduct property taxes and mortgage interest on your income taxes.

Talk to a tax professional in your state to find out what tax options you may have when you buy a home.

Less Restrictions

Of course you might have restrictions from an HOA or code restrictions but apart from those you can make your home truly yours.

You can do whatever you want inside your own home and don’t have to follow any restrictions your landlord might impose.

Paint the rooms in your favorite color, upgrade the kitchen or bathrooms or build a playground for your children in the backyard.

So being able to fully express yourself through your home and not having any limitations from a landlord is a very important reason to buy a home.

Financial Certainty

Finally you have a lot of certainty when you own your home. Especially with a fixed mortgage rate it’s very easy to plan ahead. When you rent your home you might need to negotiate a new rent every year. 

When you own your home with a fixed rate mortgage, you have the comfort and security to know exactly how much you have to pay every month until your mortgage is paid off. And once the mortgage is paid off you will have much lower monthly expenses.

Wasting Money

One of the biggest downsides being that you may waste a lot of your money.

First off you have the security deposit, which in some states could be non-refundable and can range from about $500 to 1.5 times the monthly rent. In addition you might have to pay the first and last month upfront. And finally you have your monthly rent. 

Every single dollar of your rent goes to your landlord. While some of your money pays for fees and expenses a good chunk of it will pay off your landlord’s mortgage or simply be passive income.

Always consider that your landlord will pass on all costs of the home to you.

Increasing Rent

Then you have the rent itself. Every time your rental period expires your rent can go up, which makes it very difficult to plan for the future.

It may be difficult to make purchases with long term obligations like financing a new car if you don’t know how much your rent will increase next year.

At the end of your rental period your landlord is free to raise your monthly payments and if you don’t agree you will have to find a new place to live.

Uncertainty

Which brings us to the last downside of renting. You don’t have a guarantee that your landlord will renew your lease. 

It’s possible that your landlord wants to sell the property. Or maybe a friend or family member wants to move into the home.

There are many scenarios where you could find yourself in need of a new place to live, which can become extremely stressful.

Upfront Costs

There are numerous upfront costs when you purchase a home. 

The earnest money deposit which is usually $1,000 or 1% of the purchase price and the inspection, which is usually around $300, is money that you need to have upfront. And in addition you will most likely have to pay a down payment at closing. 

If you qualify for a VA loan you can get away without having to pay a down payment but will still encounter a VA funding fee.

For non-veterans you will need at least 3% of the purchase price for a down payment. And finally you have closing costs like, mortgage fees, appraisal fees, title insurance, and taxes. You can estimate approximately 3-5% of the purchase price for closing costs.

Some mortgage programs have low down payments and even cover a substantial amount of your closing costs. However, even then you will need a good portion of money upfront.

Maintenance

Then you got maintenance. Especially when you buy a single family homes you will have many responsibilities. 

If you don’t have the time or skill to take care of things like lawn or pool maintenance, you will have to hire someone for the job, which means additional expenses.

If you’re a handy person some smaller fixes may not be a problem. 

And while most major damages are typically covered by your insurance, you might have to put money aside to cover damages or replacements that are not covered.

Moving Costs

Finally there is the cost of selling your home. If you ever want to move, you will have expenses in order to get your home sold.

Certain repairs might be necessary, some upgrades should be done and you will need to hire a REALTOR® to successfully sell your home. That takes a lot of planning and money up front.

And keep in mind that you might need to sell your home after the real estate market just took a dive which leaves you with a financial risk.

However, with the help of a good REALTOR® you could get your investments back, pay your REALTOR® and still walk away with a profit.

Conclusion

So what’s the answer to the question? Is it better to rent or to buy?

Well, from a financial point of view buying a home is better for many reasons but most of all because you build equity. However, both renting and buying also have disadvantages. 

So you need to think about the pros and cons and figure out what’s most important for you right now.

Are you still finding the right career? Are you not sure what you will be doing one or two years from now? Do you have low credit? Then renting might be the better option until you figured out where your life will take you.

Do you know exactly where you want to live? Do you have the money for a down payment? Do have a steady job and no signs of drastic change in the future? Then definitely look into buying a home and making it your own.