You might look at the title of this blog and ask yourself, “Why exactly is this a battleground?” If you were to ask different professionals in the real estate world, it will end up being a heated debate, that’s why! There are so many pro buying and pro renters out there who will stick to their side on what would work best for you because it’s what they believe but in all honesty, it depends.
“What? She’s not going to shove the “you should buy” ideal in my face? But she’s a real estate agent!” Yes, of course there are benefits to buying but there are benefits to renting as well. As I said, it depends. I am all for property investments, don’t get me wrong, but for some people it may not work and frankly, real estate isn’t the only form of investment.
So before you jump on one side or the other, there are a few questions you need to keep in mind. They are:
- Do you want the flexibility to pick up and go?
- How much do you have saved and what can you afford?
- Do you want to be responsible for repairs and maintenance?
- How long do you plan on living at the city where you are located?
- What are your financial plans/and goals for yourself and your family?
With these questions stuck in the back of your mind and if you’re on the fence with buying your home, you’ll have to start with comparing the costs.
Costs of Owning vs Renting
To be able to figure out what you can afford and what you are willing to work with, you’ll have to calculate the costs. With renting, one main thing is that you don’t have to worry about paying for any repairs. Repairs and maintenance are generally taken care by the landlord or the company managing the property, unless you caused the damage. Depending on the unit you’re renting, or home if its a house, you may pay for all or some of the utilities. Usually, if the property already has energy saving appliances, has great insulation, you had made sure to swap any incandescent light bulbs to a more energy proficient bulb, and keep the lights off unless you actually use them, your bills will remain relatively low. However, if your landlord hasn’t updated any appliances, the building is old and airy, you may be stuck with money sucking pad. Regardless, all of the costs associated with a rental will be active only during the duration of your lease. You can always move to a cheaper place or a place that is more energy efficient however, moving has their own associated costs such as a broker, credit checks, security deposits, and moving companies.
Now yes, there are such things as slumlords which is a separate thing to think about that may become costly. For example, if the slumlord decides to not give you heat when he should or if the heating system is broken and they aren’t fixing it any time soon, you may have to invest in additional heating which will cost money to purchase and additional charges to your electric bill. Yes, you can take them to court but that’s additional time from your schedule to deal with (time is money) and you won’t get reimbursed through the courts until the end most likely.
With buying, you will be indebted to the bank until its paid off which typically takes 30 years or less depending on the type of loan repayment option you can work with. You will have to take care of all of the repairs in your home, even with a condo or coop. Depending on the property type, you may or may not have to worry about all of the utilities but you will have to pay maintenance fees or common charges (if its a condo or coop) instead. Also there is insurance, property taxes or assessments. You can, however, opted to make your home more energy efficient by doing upgrades to your home to lower monthly costs as it is your home. Doing those upgrades will cost initially but will save in the long term and you don’t have to get permission from a landlord to do it. You will also be able to claim your home for tax purposes and get some reimbursements for your taxes paid. If you have a great tax advisor, you may be able to get some money back each year through your property.
What can you afford to buy?
Well the first thing you will have to have is some money saved for a downpayment. It can vary depending on the type of loan but there are downpayment requirements as low as 3% to 20%. Any higher would be really up to you and if you have that amount of money, it would lower your monthly principle. After that you would have to get an idea of what your monthly payments would look like. The best way to check what you can afford is by using a mortgage calculator like this one here or even better, getting a pre-approval.
Interest rates vary from bank to bank but as a general rule, every 1% on an interest rate equates to 12% less buying power (which was explained to me by Gabi Feuer from Freedom Mortgage). So, for example (this is hypothetically of course) lets say you would have been able to get a $300,000 home at 3%, at 4% you’re now only allowed to purchase something at around $264,000. Lastly, like I said before, you’ll also have to worry about taxes, insurance, utilities, repairs and maintenance, maintenance fees, or common charges.
Well, it’s a form of investment, that’s why! After it has been paid off, you have something worth of value which shouldn’t, depending where it’s located, depreciate in value. Typically, properties appreciate. There may be periods of depreciation due to the market and/or market crashes. Market crashes typically happen around a 10 year trend (more or less) and homes increase in value after the markets have stabilized.
Look what happened in 2008. It crashed, values in homes went down and then it bounced back even higher. During the times of stability, if it is within a moderate to highly sought after location, it will continue to appreciate year over year. You can always keep a property and move on, renting it out which would make you a landlord and create passive income. You can also use it to get cash by selling it or borrowing from it. It’s like having your own bank.
Also, if you have a family, buying can give you stability. Your kids can go to that same school year after year. They can hang out at the same park by your home. They don’t have to worry about loosing their friends and they get to keep things familiar to them close by.
If you are willing to stay at a location longer than 5 years, don’t mind putting in money to update and upgrade, and don’t mind renting out your home when you’re ready to move on, then buying would be a great option.
When buying is unaffordable for you or you’re a nomad who doesn’t like to be bothered with being hunkered down to one place, that’s when it may be better for you to rent. If you have bad credit that you’re working to fix, don’t buy. Yes, you can get a mortgage at a credit score of 620 from some banks but I would advise for you to get your score higher so that your interest rates will be lower which will give you more buying power. Your credit doesn’t need to be perfect but it should be good enough so that you can get something reasonable and have more flexibility with your purchase.
If you are planning on leaving the city that you live in within the next 5 years and don’t want to be a landlord, then don’t buy. The costs of buying, with all the fees included, will be far more than renting a place for that period of time. Buying should be paired with longevity. It just doesn’t make financial sense. If you’re a nomad who loves moving all over the place and doesn’t want to deal with having tenants, then don’t buy. If you’re not mentally prepared to deal with tenants (commercial or residential), you may go nuts. It’s best to dive into landlordhood (yes that’s a made up word) if that is your goal.
It shouldn’t be your sole or main investment
Owning multiple properties is a great investment yes, but depending on the state of the market, depending on the location and the level of demand on the area, the appreciation and depreciation values can vary. Living in New York City, we are pretty stable with appreciation with slight depreciations in various areas and property types but not by much. However, there are areas where there are tons of ups and downs. You should have other forms of investments to diversify your money. There are many people who feel that mutual funds are a more stable and more profitable method for building wealth. If owning a home isn’t for you, there are other ways to get your money to work for you out there that could work just as good or even better.
Have anything to add to the debate? What do you think is better, buying or renting and why? Please share your thoughts down below.