When making the decision to rent or buy a place to live, there are two broad categories of factors to be considered. The first and most obvious category represents the financial aspects of your decision—namely, the initial and ongoing costs, as well as the long-term pros and cons. The second category is a set of personal and emotional factors, which are more intangible, yet play an important role in the rent versus buy decision.
The affordability of renting versus buying needs to be weighed against the emotional aspect, where the expected time horizon should be a key factor.
Finances Related to Rent vs. Buy
The first step in the decision-making process is to determine whether you can afford to purchase a home. Issues to consider include your ability to make a down payment (generally between 5% and 20% of the home's purchase price) and pay closing costs (which may come to an additional 5%). These costs are likely to substantially exceed the initial payment and security deposit that would be required if you were renting instead of buying. Of course, having enough money to cover the initial purchase of a new home is only half the battle.
- Renting versus buying a home is not a simple decision—it is a personal decision which varies upon the individual and their current and expected future circumstances
- Financially, renting versus buying is based on being able to afford the down payment, closing costs, along with ongoing costs associated with maintaining a home.
- Renting provides more certainty around monthly costs for the occupant, however, a homeowner builds equity and has tax benefits.
- Not only current income, but expected future income plays a big role in the rent versus buy decision.
Before moving into your new home, you'll need to put some thought into how much it's going to cost you to stay in it after you take up residence. Many financial experts suggest that your monthly mortgage payment should not exceed 28% of your gross monthly income, and that your total monthly debt payments do not exceed 36%. If you go beyond these limits, you may run into trouble because, in addition to paying the mortgage each month, you would have to factor in home maintenance, such as new appliances and roof.
Benefits of Renting
Renting may be a little easier on the pocketbook because it provides a fixed-dollar cost for monthly expenditures, which are paid along with the rent. Besides potentially increasing from year to year, the rent tends to remain steady. If maintenance issues arise, the landlord pays for the repairs. Instead of spending your money on a new roof, you can invest it or spend it as you like.
If you've done the math and can afford to make the initial purchase and service the ongoing debt, the next factor you have to decide on is whether this purchase benefits you financially. A rent-controlled apartment in New York City, or a place in a suburban location outside of a major city, quite possibly charges a month's rent that is significantly less than a monthly mortgage payment for properties within the city. Of course, even if the monthly cost of renting is less than the cost of buying, there are long-term financial considerations that must be taken into account.
Rent vs. Buy: Long-Term Costs and Benefits
The supporters of buying instead of renting often cite the ability to build equity, the tax breaks, and the investment value of a home as solid reasons to bu. While these arguments have merit, there are downsides to all of them. This chart outlines the positive and negative long-term realities of the equity, tax breaks, and investment value associated with buying a home.
Do the Calculations
A variety of online calculators are available to help you evaluate the financial aspects of the rent-versus-buy decision, but keep in mind that you need to estimate a range of variables, including the number of years you will stay in the home.
To estimate the investment profit the home will provide for you, you must assume the yearly rate of appreciation on the home's value. The results provided by a calculator, as well as the investment evaluations you make, are only as good as the assumptions used to calculate them and don't forget to consider the cost of ongoing maintenance. After you have carefully considered the financial issues, it's time to explore the non-financial issues. There are, however, other things to consider beyond the financial aspects when it comes to renting or buying, such as amenities and flexibility.