It’s one of the biggest questions of our time – especially for young adults. You have a stable job, you’re getting older, and you want to know if you should keep spending your money on rent or if you should invest in a house. Twenty years ago, the answer was simple. Having a house was simply the next step in adulthood.
But these days, things are a bit more complicated. The real estate market is volatile, and it’s hard to know when is a good time to buy. Individual savings rates are at an all-time low, making it difficult to come up with an ample down payment. Student debt is a big obstacle when it comes to applying for new loans. So what should you do? Let’s take an objective look at some of the costs and benefits of renting versus owning.
Renting A Home
- You aren’t on the hook for maintenance and repairs. If you rent your home, the property owner or landlord is the one that’s responsible for making sure that everything is in working order. If your fridge breaks or your dryer stops working, you have someone you can call to come fix it, usually at no charge to you.
- You can move anywhere you want. Sure, you have a lease for three months, six months, a year, etc. But after that time is up, you can pack up your stuff and move thousands of miles away without having to worry about fixing up and selling a house.
- You don’t have to save up a ton of money. That security deposit and first month’s rent may seem like a big chunk of change – but it’s nothing compared to 3.5%, 5%, or even 20% down on a house.
- No equity. Once you sign over that rent check, you’ve got a place to live. But next month, it’s no more yours than it was the month before. When you move out, the rental will still belong to your landlord and you’ll be looking for a new place to live.
- No tax benefits. Unlike owning a home, renting an apartment has no appreciable tax benefits or advantages, which means you’ll be stuck paying more on your tax bill.
Owning a Home
- You have a place to call your own. As long as you pay the mortgage, no one is coming to take your home away. That means you can paint, renovate, make improvements, garden, etc. – all without having to worry that your effort will be for nothing when you move out.
- You save money on your taxes. Having a mortgage is a big benefit when the taxman comes calling. You can deduct your mortgage interest, and you may qualify for tax credits depending on what you buy and where it’s located.
- You can take advantage of first-time homeowner programs. Lots of states have first-time buyer programs that are essentially free money. Forgivable down payment loans, grants, and tax credits are just a few of the ways that our government encourages young people to buy their first house. Looking into these programs may be a big help if you’re debating whether you can afford to buy a house.
- You are building equity in a stable asset. As you pay down your mortgage, you own more and more of your home every day. By the time your 15-, 20- or 30-year term is up, the house is yours, free and clear. That means you have an asset worth hundreds of thousands of dollars – hopefully even more than you paid for it as property values increase and adjusted for inflation. At this point, you can sell your house and downsize for a tidy profit; you can rent out your home and move elsewhere for monthly income; or you can live in your house without owing anyone a dime (other than property taxes and utilities).
- It’s your problem. If something breaks, you have to fix it or live without it. That may not seem like a big issue when a light bulb burns out… but if the roof needs to be fixed, you’re looking at a substantial and expensive repair (or replacement).
- Value isn’t guaranteed. The real estate market is fickle, so it’s never a guarantee that your home value is going to go up. Homes tend to appreciate over time, but if you buy a house and need to sell it 3-5 years later to take a new job or be closer to family, you may end up taking a loss.
- Opportunity cost. Yes, your home is an investment. But while you’re putting tens of thousands into a down payment, closing cost, upfront repairs, etc., that money could be working for you if it were invested instead. Just like the stock market, treating your home as a financial investment is a gamble. The hope is that it will pay off, but you’ll never know for sure until you roll the dice.
So what’s the answer? Do I rent or do I buy? No one can answer that question but you. But if you’re looking for additional advice, talk to people you know and trust. Use online calculators (like this one from the New York Times – http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html) to gauge your expectations. Consider your short- and long-term goals. Talk to a financial professional. And ultimately, make the decision that you believe is right for you.