Buying vs. Renting: The age old question

Buying or renting a home is a choice that never seems to be settled for certain. It’s easy to find experts that claim buying is better; it’s also easy to find experts that claim renting is better. The best idea is to consider all the factors involved and decide which is best for your own circumstances.

Remember that there are other factors to consider besides money; there are personal and emotional considerations as well. We’re going to focus on the financial side, but keep those other factors in mind, too.

What is Your Financial Situation?

Can you afford to purchase a home? A down payment and closing costs are going to cost more than the security deposit and first month’s rent on a rental. After the initial costs, you still have to be able to afford to stay.

Rental costs tend to be rather fixed. You’re not going to have to pay for a new roof or a new furnace. Mortgage payments can be less than rent, but there are the possible repair costs that can always pop up. Rents tend to rise slightly every year, but there are no big surprises.

Long-Term Financial Considerations

The main things to consider are equity, tax advantages, and investment potential. These factors do not necessarily guarantee, however, that owning is better than renting, even when looking at purely financial considerations.

1. Equity. While making mortgage payments, you build equity in your home. This happens slowly at first, as the bulk of your payment is going to pay the interest on the loan. On the other hand, with renting, you’ll never see a penny of the money you’ll pay in rent to a landlord; it’s gone forever.

* If you’re only going to be in a home for a short period, renting makes a lot of sense. You won’t have enough time to build any equity in the home unless you got a great deal or the housing market heads for the skies.

2. Tax advantages. While rent isn’t deductible on your federal income taxes, mortgage interest and property taxes are. Another nice advantage: if you sell your primary residence and make a profit, your gain is exempt from federal taxes (unless you really make a killing). The interest on home equity loans is also deductible in most cases.

* Owning a home has several tax advantages, but keep in mind that these tax breaks aren’t exactly ‘free’. You will likely pay $1.00 of interest to get back ~$0.33, but you’re still losing $0.66. The same goes for your property taxes, and property taxes never go away.

3. Investment potential. Paying rent isn’t an investment. But if you live in a rent-controlled area, or an area when rents are quite low compared to the cost of home ownership, you could take the extra money you’re saving and invest it.

* A home can be a decent investment, but if you look at the return you get when taking into account all of your costs, it’s rarely a great investment. Consider all the money you’ll pay in interest, repairs, taxes, and everything else that goes along with owning a home. You’ll probably find the return isn’t that great.

* Just because your home is probably your largest asset, it doesn’t mean it’s a great investment. It can be a better investment than rent though, and everyone has to live somewhere.
As you can see, it’s not entirely clear-cut whether it’s better to rent or own. In general, it’s better to rent in the short-term, unless the housing market is growing rapidly or you get a fantastic price.

Owning is usually preferred in the long term, but don’t kid yourself into believing it’s a great investment; in most cases, it’s just better than renting.

Do your homework and make a smart choice based on your own situation and how you feel about owning a home. Is it a dream of yours? Do you enjoy the privacy? Do you mind the expense, work and responsibility that go into maintaining a home?

There are many reasons that may lead you to determine that either owning or renting your home is your best choice.

About the author

Loren Winzeler

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