Renting vs Buying a House: Which One is Right for Me?

Should I rent or should I buy? What was once a simple question of renting vs. buying a house is now much more complex. For the longest time, it was assumed that once you earned and saved enough money, you would buy a house because ownership was the dream as well as the most financially responsible decision. But that’s not necessarily the case anymore. Life today is different and many people are renting vs buying a house for a wide variety of reasons. It used to be as simple as running the numbers to see if you could afford to buy a house, but now there are more lifestyle factors at play.

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First, from the investment angle, home ownership was always seen as an important step toward building wealth and security. That was because properties typically appreciated in value and yielded more profit than investments might have. Look back over the past decade at the real estate mortgage crisis and you can see that appreciation in value is no longer a guarantee. Countless people currently still own houses that are “under water,” meaning that the amount they owe on the mortgage is greater than the sale value of the home.

In addition, prices in some housing markets across the globe have skyrocketed to the point where many people – especially first-time buyers – can’t afford to enter the housing market. According to the Institute for Fiscal Studies, millennials that earn a middle-range income are finding it difficult to buy because housing prices have grown far faster than income has.

Finally, many millennials feel that they cannot afford a home because of student debt and credit challenges, according to NYpost. In addition, young people are deciding that they do not want to take on the expense of upkeep, opting instead to rent and have more free time by not spending it (and their money) on home improvements and repairs.

You need a place to live, so how do you decide whether renting vs buying a house best for you? As already mentioned, many factors are at play because buying a house is no longer simply an investment decision. We’ve taken a look at the costs involved in both, as well as the various pros and cons of renting vs buying a house. Read through this guide and decide for yourself about renting vs buying a house.

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Renting

The Costs

If cash on hand is a problem, renting requires less money up front than buying a house does. Still, renting a new apartment and moving involves a number of costs that you need to prepare for.

Rent – Generally, you will need to pay the first month’s rent in advance. Some properties also require you to pay the last month’s rent when you move in as well. This may or may not serve as a security deposit.

Security Deposit– This is a sum of money that you pay to the landlord in case of property damage that requires repairs, or extra cleaning. In addition, many landlords deduct a move-out cleaning fee from the security deposit for repairs, repainting and cleaning between tenants. It is important to know the laws of the state in which you live to make sure that the deposits you are being asked to pay are legal. While large rental groups will likely be compliant, individual or smaller rental companies may not be.

Fees and additional deposits– Have a pet?  The great news is that more and more apartment communities allow certain types of pets. The downside is that you will likely have to pay an additional deposit and/or fee to keep a pet. This defrays the cost of extra cleaning that might be necessary from pet accidents and extra wear and tear on the flooring.

Moving – No matter whether you arerenting vs. buying a house, you’ll have to move your stuff and at some point, the job will likely become too big to handle on your own. You’ll need to set aside money for movers, or at least the rental of a moving truck if you are going to do it yourself.

Renters Insurance– Not all landlords require renters insurance for their belongings, but it is advisable to do so. In case of a robbery, fire or weather-related catastrophe, renters insurance can help you replace your furniture, small appliances and personal items. According to State Farm Insurance, the first step is to determine what your belongings are worth by making a list of everything and its value. The cost of the policy will vary by location, type of apartment and amount of coverage you choose. Some larger rental communities may require evidence of renters insurance before you can move in.

Utilities – Whether or not the utilities are included in your rent will vary. Some landlords may include water or heat, but not other services. Be clear what utilities are covered by the rent and which ones will need to be budgeted for each month.

Laundry. If you don’t have a washer and dryer in the apartment or home you are renting, you will have to pay to do it in a laundromat. This can add up and should be a line item in your household budget if you are renting.

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The Pros of Renting

Maintenance or repairs aren’t your problem

Renting is the maintenance-free way to live. All the repairs and major appliance replacements are the responsibility of the landlord. That can be a real time and stress saver when the heat or air conditioning goes out and you need to be at work.

Moving is a breeze

As long your departure fits the terms of your lease, you’re free to pack up and move somewhere else, whether it’s across town or across the country. There’s no house to worry about selling at a price that’s high enough to make good financial sense. This is why renting vs. buying a house is often the best option for people who change jobs frequently or are often transferred to another company location.

Renting vs. buying a house is cheaper

When you rent, there’s no big down payment to save for and you don’t have to worry about home prices fluctuating. If property values go down, it’s not your problem. The rest of your cash can stay in your investment accounts.

Credit rating is not as big a concern

To be approved for a home mortgage and get a good interest rate, you need a great credit score. Even though you’ll need to undergo a credit check when you apply to rent an apartment, it’s typically not as rigorous as a mortgage credit check. Unless your background has big red flags such as bankruptcy or an exceptionally credit low score, you’ll be able to rent. Also, if your financial situation is in flux or unstable, renting can be a better option.

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The Cons of Renting

No Real Estate Equity

Despite paying your rent on time and taking good care of the property, you’re not building any equity. That means that when you leave the property, you won’t have built up any real estate wealth. Depending on where you live and your individual situation, this may be a disadvantage.

No Tax Benefits

Despite changing tax laws, it’s likely that homeowners will still be able to deduct some portion of their mortgage interest and property taxes on their income tax returns, and the federal/and or state level. This can be a major factor for some renters, especially those with higher incomes.

Rising Rent

Generally, a landlord will raise the rent to keep up with the market and to cover rising costs. Homeowners with fixed-term mortgages will not face the same uncertainty and can plan on payments being steady for the life of the loan, no matter whether the real estate market goes up or down. In a rental property, you have no control over whether the rent will rise or by how much.

No guarantees

Despite laws that prevent against unlawful eviction and require adequate notice if you won’t be able to renew your lease, there’s no guarantee that you’ll be able to stay in a rental property indefinitely. Even if you are a model tenant, properties sell, convert to condos, or otherwise change, meaning residents have to move on. As long as a homeowner keeps paying the mortgage, he or she won’t have to move.

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Buying

Buying a home can be a good decision but before you start looking it’s crucial to know what you can afford. Most financial experts will tell you that total housing costs should not 28%-30% of your gross monthly income. It’s also important to keep in mind that in many markets, starter homes are in short supply, making competition for those properties more intense. If you’ve looked over your budget and credit situation and thing you want to move forward with buying a house, here are the factors to consider:

The costs of buying

As you can imagine, the upfront costs of buying a house are far greater than renting. If you’ve looked at renting vs. buying a house and think you want to buy, consider these sums that you will need to have before you can get the keys to your own place.

Earnest Money. When you find a house you like, in addition to making an offer you will also have to provide a check to the seller as “earnest money.” Typically, about 1 to 3 percent of the sale price, the money shows the seller that the buyer is serious about the offer. If the offer is accepted, the money will go into an escrow account until the closing on the property when the buyer receives credit for the payment.

Down Payment– This is another amount you will need to specify when the offer is made to the seller. The total is the percentage of the purchase price that you will pay at the closing. Depending on the type of mortgage, your credit rating and the local housing market, the ideal down payment is generally 20 percent. Some mortgages allow 10 percent down payments and loans form the Federal Housing Authority (FHA) can be as low as 3.5%.

Appraisal– Before a mortgage is approved, buyers are required to get an appraisal of the property. This is done to make sure that the sales price matches the market value of the home. An appraisal typically costs anywhere from $300 to $500.

Inspection—  While these may not be required by the lender, an inspection by a licensed professional is alwaysa good investment. The inspection can identify flaws or needed repairs that buyers don’t notice. If any serious defects are found, it can lead to negotiation with the seller on who pays for or handles the repairs or renovations. These also cost around $300 to $500. Some additional fees may be involved if you live in an area where radon or mold testing is beneficial.

Property Taxes   Homeowners have to pay property tax in advance, so depending on the tax cycle where you are buying, a portion of the property taxes may be included in the closing costs to reimburse the sellers for the amount of time they have already paid for.

Homeowners Insurance. Before you can sign on the dotted line at closing, you will need to provide evidence that you have purchased homeowner’s insurance. Premiums are generally paid annually, so you’ll have to cover the first year up front.

Private Mortgage Insurance. If the down payment you are making is less than 20 percent of the purchase price, you may be required to buy private mortgage insurance. This policy protects the lender in case it has to foreclose on the home and sell it at a discount. Payments will vary according to the down payment and the buyer’s credit rating.

Additional Closing Costs. It’s difficult to say what these will include because much depends on the property, location and your individual mortgage situation. Typical fees and costs can include credit report fees, loan origination fees, flood certificates, title insurance, recording taxes, among others. Closing costs are typically 2% to 4% of the sales price.  Of course, mortgage providers often have varying options that combine slightly higher rates with lower closing costs and vice versa.

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Other Costs

Once you’ve purchased the property, you’ll need to make regular mortgage payments as well as property taxes and insurance. Some lenders will allow you to include taxes and insurance in your monthly payment. The amounts will be held in escrow until the lender pays the charges on your behalf.

Utilities– Once you own a home, all the utilities are your responsibility. It’s a good idea to budget for water, gas, electric, garbage and recycling, cable and internet.

Maintenance. It’s not one of the joys of home ownership, but it is definitely the main responsibility. Maintenance includes everything from repairs when things go wrong to regular replacement of aging appliances and fixtures. In addition, large appliances like heating and air conditioning need regular inspections and tune-ups to make sure they are working properly and efficiently. Home maintenance budgets also need to take into consideration any work you will not be doing yourself, such as cleaning, painting, snow removal, yard work and other landscaping. A basic guideline is to plan on budgeting 1 percent of the home’s value for repairs and maintenance.

You’ll also want to have a fund for larger repairs, such as if you have to replace a broken window, soiled carpeting or a hole in the wall. Many repairs are more expensive than one might think!

Furnishing. Any time you move into a house, there are things you will need to buy, from assorted new lamps or hardware to additional pieces of furniture. You’ll want to keep some money aside for these purchases. If you are a first time home buyer, it’s very likely you will need to buy more furniture unless you are moving from an equally large rental property. No matter if you are buying new furniture or second-hand pieces, the expense needs to figure into your budget, even if it’s over an extended period of time.

Moving Costs. Depending on how much stuff you have, you may or may not be able to get away with renting a truck and doing the move yourself. If not, you’ll want to get estimates from movers because depending on the volume of belongings and distance traveled, this will likely run from $500 to perhaps several thousand.

Renovating and Redecorating. Making a home your own is part of the fun of home ownership.  Of course, that carries its own price tag. If you feel that major renovation projects will be required for you to be happy in your new home, it’s critical to have realistic estimates of how much they will cost before you commit to a particular house. Even new carpeting or hardwood floor refinishing can run into the thousands of dollars if the square footage is large.

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Advantages of Buying

Despite all the costs, buying a home can still be a great decision for many people. If you don’t anticipate moving from the area for a longer period of time and have decent credit, buying a house might be the right decision. Also, if prices are on the rise, waiting could be costly.

You’ll Build Equity

Owning a house lets you build up equity.  With each mortgage payment, you’ll be paying down the principal amount of your loan – albeit likely a small one. If you’ve paid off at least 20 percent of your principal, you would be able to refinance your mortgage if interest rates fall low enough to make it financially worthwhile. According to TheNew York Times, on average, homeowners have a net worth ($195,400) that is 36 times that of the average renter ($5,400). Also, major improvements you make to the home will help increase its value, although you should not count on recouping the entire cost of any renovations or improvements.

Some Tax Benefits

As a homeowner, there are some tax benefits to owning a home. With pending changes to the federal tax code in the United States, it’s hard to say what the tax breaks will be in the future, however, it’s currently allowable to deduct home mortgage interest if you itemize deductions. Property tax is also currently deductible.

In many states, if you own a home and live in it, you may qualify for a homestead exemption. This means that a specific amount of your home’s value would be exempt from property tax, thus yielding a savings.

Rental Income Possibilities

If you own your home, you can rent out part of it to help defray the cost of your mortgage and expenses. Even short-term rentals through Airbnb or other sharing services can help with costs. This is a great option if you run into financial difficulties and need help covering expenses.

Building a Community

Anytime you buy a home, you become part of a neighborhood that is less transient than an apartment building. Meeting neighbors and living near your children’s friends can help grow your community and increase personal connections. All of this makes life a richer experience.

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Disadvantages of Buying

Exposure to Financial Risk

Yes, owning a home helps build equity, but that doesn’t mean you might not lose money when it’s time to sell. If the housing market drops, as it did in 2008, your home may be worth less than the mortgage you have on it. That means that if you have to sell, you will lose money when paying off the mortgage.

Maintenance and Repairs

As a renter, you just call the landlord when pipes burst, the sink overflows, or the heat doesn’t work. When you own a home, the responsibility for everything is your own. As noted above under costs, the amount is not insignificant and should have a place in your annual budget.

Buying More Things

A bigger home, more rooms and more space mean more stuff. You’ll want to furnish all the rooms in the home– eventually – and this means more money. Knowing what you have and what you will need to buy can help create a budget for all thing things required to make your new house a comfortable home.

High Cash Costs

As we’ve already noted, between just the down payment and the closing costs, you will have to have saved a substantial amount of money to purchase a home. Add on the costs of moving and getting set up in your new place with utilities and furnishings and the amount can seem monumental. It is without a doubt the largest purchase most people will ever make.

So once you’ve evaluated whether renting vs buying a house is best for you, grab your budget and start touring the open houses. If you’re renting, you can pick and choose properties with the amenities that you really want. If you’re buying a house, do some research on line and then call your real estate agent. Even though both renting and buying are big life decisions, looking at properties and planning for change can be very fun and exciting!