The debate to buy or rent has been covered countless times, usually involving a calculator to help you make a decision based on the numbers. While we agree that you have to decide which is the better financial decision for you, we also know that is only part of the decision. Our goal with this article is to help you make the decision that is right for you, beyond the calculations.
Buy or Rent - Both Are Right
Debating as if one option is always the right choice is a complete waste of time. Whether you decide to buy or rent, both options can be right. The question comes down to what is the right choice for you at this time? Both options have their advantages.
Advantages of Buying a Home
- You’re the owner. If you want to make changes or renovations, you have a lot more freedom to do so than you do when renting.
- Building equity. As you pay off your home, you build equity in it. That equity builds wealth, borrowing power, and means more in your pocket when you sell your home (assuming appreciation).
- Tax credits can help offset some of the costs that come with home ownership. Because these are continually evolving, we recommend seeking expert advice specific to your financial benefits.
- Much more predictable. You don’t have to worry about renewing a lease, or having your monthly rent increase. Depending on the type of mortgage you have, your monthly payment could be the same years from now as it is today (possibly even lower if refinanced).
- You can be the landlord. Even if you’re not buying your home as an investment property, you could likely rent out a spare room to help further offset some expenses.
Advantages of Renting
- Opportunity cost. While down payments are not required to be 20%, even a down payment of 3.5% can still easily be tens of thousands of dollars. There is the opportunity cost of how else that money could be used compared to the price of a security deposit on a rental. For example: You could invest that money for a return in other ways (such as stocks or retirement savings).
- Low maintenance. Fridge break? Roof need to be replaced? While there are home warranties to help cover these things for owners, in a rental you just let someone else deal with it.
- Experience multiple places. Let’s say you know you’re going to live in the same area for the next five years. If you rent for all five years with 12-month leases, you could live in five different places in that time. This would allow you to become more familiar with specific areas and property types. Of course, that would mean moving five times, but we’re looking at this glass half-full.
Make a decision, without a Buy or Rent Calculator
If you’re buying a home that will not be an investment property (i.e., you plan on living there), then you need to think of your home as more than an investment. Period.
Here are three things to consider:
- Future Plans
- Your Current Financial Situation
1. Future Plans
Buying a home is not a short term decision. It would be best if you considered your plans for the next 5-10 years at least.
When you plan to move should be taken into consideration. For example, if it’s in 2-3 years that could lead to a different decision than if you plan to in 7-8 years.
Will your family be growing? This could mean a significant other or another family member moving in, having kids, getting a pet, or a combination of all of these!
These possibilities need consideration because if you’re going to buy and any of these options could happen in the next few years, you’ll need to purchase a place that will accommodate the additions. Otherwise, you could find yourself needing to sell AND buy a new home.
Take your work into consideration. Do you plan on staying at your current company for a while? If so, is there a chance that it would relocate you soon? If not, are there plenty of other jobs nearby that you would want to work at?
Part of this can undoubtedly be considered in your plans, but it’s a big enough factor to be its own. How familiar are you with the area? If you are new to a city, you could decide to rent while you become familiar with the area and to help you know where you want to buy.
If you are familiar with the area and know where you want to buy, location still plays an important factor. What are the three most important things in real estate? Location, location, location.
In this case, we want you to consider location regarding market values and your current financial situation. If you know you can afford a $200,000 home but can’t find a home you like for less than $500,000, then you don’t need a calculator to tell you it may be better to rent for now.
3. Your Current Financial Situation
Did you notice how the previous section ended with “for now”? That’s because your finances continuously change.
Consider your credit score, and how much debt you have. Be sure to include credit cards, car payments, student loans, etc. You want to make sure you won’t be “house poor”, to where all of your money goes to your bills including your mortgage, and you don’t have any money left to do things you enjoy.
As a general guideline, your debt-to-income ratio should be 43%, including a mortgage payment.
Whether you decide to buy or rent, the decision is right. The question is: is it the right decision for you? Unless you are buying a property strictly as an investment, it will take more than a calculator to help you decide which home is right for you.
Feel free to use our home search to help you find the right home. Hopefully, we’ve given you some guidance to help you make the right decision for you.
Keep Reading: The Ultimate Guide to Buying a Home