Rent vs. Own: What is the call for you?

chess, this that and the mba, mbaThe following is a guest post from Steph Medeiros with Californiamortgageblog.com. She covers trends in real estate, home financing, and jumbo mortgage loans.

Comparing the Costs of Renting and Owning A Home

To rent or to own…that is the question. Whether you’re thinking of ditching the renter’s lifestyle for a home you can call your own, or you’re tired of the financial and physical responsibilities that come with home ownership, you might be wondering which option is right for you.

In today’s market, buyers can find some great bargains – but what about the overall cost to own a home? Is it worth it? Depending on your situation, it may be financially wise to buy a home. Or, it could be smarter to rent for a while.

Take a look at these factors to help you determine whether you should buy or rent:

1. Investment

Buying a home is an investment. Probably one of the biggest investments you’ll ever make in your life. Since real estate typically appreciates over time, if you buy a home for a fair price today you can reasonably expect that it will be worth several years down the road. In the meantime, you need to be capable of paying regular, monthly payments.

Renting, on the other hand, is sometimes equated to “throwing money away”, since you’re not building equity or receiving a tax break. It might not be fair to say renting is a waste of money, as many people prefer the carefree lifestyle, and you are receiving a place to live in exchange for your monthly rent payment.

2. Financial capabilities

Many of the people who got into trouble during the housing crisis bought homes at prices they couldn’t really afford. This all too often resulted in foreclosures and major financial losses for the owners. This doesn’t mean you shouldn’t buy a home – it simply means that if you do decide to buy a home, make sure it’s priced within your means. Have an emergency fund built up that will cover three to six months worth of living expenses in case of an interruption in income.

Renting is much less of a financial commitment. If you lose your job or have some other type of financial hardship the worst case scenario would be that you need to break a lease in order to move to a less expensive home. In many cases, landlords and property managers will even work with you in a situation like this.

3. Long-term costs

Owning a home is expensive. In addition to the upfront costs of a down payment, fees, and the purchase itself – a homeowner will spend a lot of money on maintaining their home over time. Unlike renting, if something attached to the house breaks, you have to pay to fix or replace it.

Estimate that you’ll spend about one percent of your home’s value on maintenance, assuming it’s not a fixer upper and you’re not making any major renovations. Some years it’s likely to be less, and some years more. For example, painting your home’s exterior, replacing the roof, or replacing the siding could each cost several thousand dollars, even for a modest-sized home.

So, to recap:

It could be financially wise to rent if you…
* Do not have the capability to pay for the long-term costs of a home
* Prefer not to have the responsibility that comes with owning a home

It could be financially wise to buy if you…
* Have the financial capability to make regular, monthly payments on a home priced within your means
* Want an investment that could pay off in the future

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Comments

  1. I’ve been itching to stop throwing away money to rent. I just need to get in a financially stable position where I am confident that I would have no problem taking on the extra costs of home ownership. Plus I am weighing the possibility of moving away from the city I’m currently in. It’s just too expensive to buy here.

    • @ Jeremy – are you staying north of the border still? Ever consider purchasing a duplex, that is what I have currently and love the fact that my tenant pays my mortgage!

      • Yes I’m staying north of the border for the foreseeable future. If there was the right job opportunity I’d move south, but I haven’t been actively looking.

  2. I’m wondering how one factors in the unusual characteristics of today’s real estate market: Home prices were still falling (as of February) in 16 of 20 cities tracked by the S&P/Case-Shiller index. In Atlanta, prices in February were 17% lower than Feb 2011. Yikes! How does this grim reality play a role in a rent/buy decision? Should one look only for foreclosures or short sales to try to get an extraordinary value? Thanks.

    • @ Kurt – the real estate market in my neck of the woods really didnt take a big hit. Now that you point that out it might be worthwhile trying to pick up a foreclosure or short sale. You just have to be careful with foreclosures because the prior people sometimes do things to the house that might not be detectable on initial inspection. If you can get a great deal on a house i say go for purchasing it. I think tracking trends of the market that you are currently in is what you need to do. Compare the price per square foot in the area and what comparables have sold for over the past few years to see if you can really dicker the price down on the house. You definitely do not want to end up underwater on a house a few months after you buy it. ๐Ÿ™‚ just my 2 cents.

  3. Everybody thinks they’re throwing away THOUSANDS of dollars on rent when in reality they’re only losing what they would have gained in principle. On a 30 year mortgage we were building about $180/month in equity…big whoopie (lol. Yes! Love throwing random words in).

    The long-term costs of maintaining and repairs outweigh the small amount of equity you build. Now…if you can afford to buy a house within your means and get on a 15-yr fixed mortgage, then we’re talking about building up some serious equity.

    Regardless, renting is great and in reality you’re going to throw money away whether you rent or own. You’re either paying it to the landlord or you’re paying it to the bank.

    • @ Jason – ever eat those whoopie pie cookies concoction whatever you want to call it. sorry random. I know you really are not building too much equity once you start paying on the loan so like you point out it is either to the landlord or bank.

  4. I want to buy a multi-unit building and collect rent from my neighbors!

    • @ Frugal – that is the way to go if you can get one in a decent area and for a good price. I would love to do that if I could convince my wife to go along. I just like the idea of very little work for the cash flow. I would do the maintenance too.

  5. I can’t agree more with this list. I really hate how people think that there’s only one way to go – either rent OR buy. What everyone has to do is figure out what they want in the future. Some people are renters and some people are buyers. We can all learn by example from the people that bought when the market was hot and now are under water with their homes. For myself, I have outweighed the pros and cons of home ownership and it’s definitely for me!

    • @ Shopping2Saving – are you looking to purchase in the near future? Very true you need to evaluate your own situation before making a decision. Renting is great for some and not so great for others. Enjoy your weekend!

  6. In this area, the rent vs buy decision is almost a no-brainer. It’s a college town, meaning there is a high demand for renting and low demand for buying. You can buy as large a space as, if not a larger, as you can rent.

    We actually bought a mobile home. For what we were paying in rent, we will have it paid off in less than 10 years. After a few years, we may buy a piece of land to put it on so we don’t have to pay lot rent any more.

    • @ Edward – That sounds like it was an easy decision for you. You should do a post on how you are paying it off so quick and how you came about your decision. Are you making any sacrifices to pay it off so quick? I would love to read about it.

  7. The best option is to buy a house with cash at a steep discount. If you can save 75K and then find a house that was once worth $150K for 75 then that’s the best investment you can make.

    • @ Shilpan – very true most times anything you buy in cash you can get a good discount. I know some who have gone in to purchase a car and gotten good discount. Id love to have 75k laying around. I bet when you are putting 75k down on a house you will think alot more about the decision too because it took you so long to accumulate.

  8. We bought a house because the housing market is pretty cheap where I live. I live in the Midwest and usually mortgage payments are cheaper than house payments.

  9. Owning a home is expensive but it could be a good investment especially if you live in an area where there is always a huge demand for real estate property and price rise is always decent. (That is true for India where land prices always rise). Problems for us is that now investing in real estate has become so expensive that it is going outside the reach of common man. (Cost of an average flat here is about 100 times my current salary – not may savings but my complete salary) Though I can get it financed but would I be able to sustain my job long enough? That is the question which makes me think to better live in a rented house rather than buying a new one.

  10. by salary I meant “monthly salary”

  11. I have lived in a home that has cost me less to own than rent. My suggestion is, find a good deal on a house, buy it and you will no longer have to deal with undesirable apartment neighbors.

  12. ….you forgot to include the tax benefits of owning a home

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