“Renting is a waste of money; buying a house is the only way to go.” We’ve all heard comments like these both during our younger years when we’re presumably saving money for a down payment, but also later in life when we realize the question may not be as simple as it seems.
As one of the most prevalent misconceptions to date, the logic that buying is always the way to go has more than likely convinced someone somewhere to make a financially irresponsible decision. The truth is either buying or renting could be the better choice, depending on various personal, financial and market factors (and regardless of age). Choosing one or the other requires assessing these considerations and the options available to you.
Here are just a few factors to assess when deciding whether to buy or rent your next home.
Initial Costs
The first noticeable difference between buying and renting is upfront costs. Renting typically requires a security deposit and possibly the first and last month’s rent. These upfront costs are relatively low compared to buying a home, which involves a down payment, closing costs and various fees. Down payments alone can be 20% or more of the property’s purchase price, representing a significant investment. For many, tens of thousands of dollars in down payments are just not feasible, but some state home buyer programs and other special loans could help. For example, those who qualify for a USDA or VA loan aren’t required to put anything down, thereby cutting off a large portion of closing costs. Research the available offerings in your home state to see if you qualify, especially for first time homebuyer programs.
Monthly Expenses
Monthly expenses differ significantly between renting and buying. Renters often have a predictable monthly rent payment, which can increase over time. Homeowners, on the other hand, have mortgage payments that could be fixed or variable. Additionally, homeowners must budget for property taxes, homeowner’s insurance, maintenance and possibly private mortgage insurance (PMI) if their down payment was less than 20%. A general rule of thumb is to set aside 1-4% of the home value each year for unexpected repairs.
Equity and Investment
One of the primary financial advantages of buying a home is building equity. Equity is the portion of the property that the owner actually owns, free and clear of any mortgage. As mortgage payments are made and property values increase, equity grows, creating a potential source of wealth. Renting does not offer this benefit; renters pay for the right to live in a property but do not gain ownership or any investment return. Renters can partially offset this by investing the excess savings in housing costs into the market as another form of investment instead.
Flexibility and Mobility
Renting offers greater flexibility and mobility, which can be crucial for people who might need to move frequently for work or personal reasons. Breaking a lease can be costly, but it’s generally less complicated than selling a home. Homeowners have less flexibility due to the time, effort and cost associated with selling a property. This could be a significant financial consideration if the housing market is slow or if someone is required to move quickly due to an external factor. Keep in mind that most homeowners will lose out financially if they end up selling their homes within five years of purchase due to the large closing costs.
Market Risks and Benefits
Homeownership can be a hedge against inflation since owners pay a set mortgage that doesn’t increase over the years. They may even benefit from the rising home prices attributed to inflation if they decide to sell their home in the future. There is a risk that the housing market faces a downswing, but this only impacts homeowners if they decide to (or need to) sell during that period instead of renting out their house or waiting. Renters face the rise of inflation head on through increases in rent every year. Although some of this is controlled by legislation, landlords are allowed to increase rent by a certain percentage whenever renters reapply for a lease.
Tax Implications
There are tax advantages to owning a home. Mortgage interest and property taxes are typically deductible on federal income taxes, potentially reducing your overall tax burden. Additionally, when selling a home, there may be capital gains exclusions that allow homeowners to keep a portion of the profits tax-free. Renters do not receive these tax benefits. Some states may allow a deduction or credit to renters if certain criteria are met.
Long-Term Considerations
Over the long term, buying a home can be more financially advantageous than renting, depending on the various factors discussed above. As mortgages are paid off, homeowners can eventually live mortgage-free, reducing their living expenses significantly. Renters will continue to pay rent for as long as they lease their living space. Additionally, owning a home can provide stability, representing valuable intangible benefits.
The decision to buy or rent a home involves weighing the financial implications along with personal preferences and lifestyle choices. Buying a home can be a good investment and offer long-term financial benefits, but it requires a significant initial investment and comes with ongoing responsibilities. Renting provides flexibility and predictability with fewer upfront costs but does not offer the potential for equity growth. Carefully considering your financial situation, lifestyle needs and future goals will help you make the best decision for your circumstances.
For more information, please contact Reema Patel via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
