Share this Article

Should You Rent or Buy Your Next Home?

Written by on Tuesday, 29 April 2014 1:06 pm

What makes people want to buy a home?

Privacy, proximity to family and friends, ambiance, environment and a sense of community all contribute to the emotional side. Tax breaks, transportation, amenities, and the opportunity to build equity are also factors. But the number one reason people buy homes is the desire to own a home, with the desire for more space a close second.

So why rent? During the economic downturn of 2008, housing lost value for five straight years, illustrating the risks of homeownership. In 2013, despite a dramatic turnaround in housing prices and sales volume, a study by the Joint Center for Housing Centers at Harvard University found that buyers are still skittish.

"Unemployment has remained stubbornly high and incomes have fallen, straining household budgets," wrote researchers. "In this environment, renting offers a flexible housing choice that enables households to adapt to changing financial circumstances—including the need to relocate quickly, whether to find a more affordable home or to take a job elsewhere in the country."

For most households, renting is less of a financial stretch than buying a home. Even in the best of times, homeowners must come up with a substantial amount of cash to cover the downpayment and closing costs, as well as be prepared for upcoming repairs and maintenance. While renters typically have to pay a security deposit plus the last month's rent, the total outlay is usually more modest than the upfront costs of buying. Equally important, renters who want to move do not incur the steep costs associated with selling a home.

Renting also brings greater certainty to household budgeting because tenants do not have to cover the costs of unexpected but necessary home repairs. Owning a home, however, requires money, time, and skill to manage its upkeep. Renting transfers responsibility for maintenance to a landlord, reducing risk and worry for those who prefer to avoid these obligations.

Renting was the best port in the storm, particularly when rental prices dropped in many areas as well. For many, the freedom from maintenance issues and the ability to move when and where they want, is preferable to the long-term commitment to owning a home.

Beginning in 2009, the edge began to move to homeownership. Due to still-low home prices and rising rents, The Center for Housing Policy predicted that home buyers who purchase can build equity within four years, about the same length of time it takes to recoup closing costs. The reason building equity is important is that you can take money out of the home when you leave, which is not possible for renters.

So how do you know if it's better for you to rent or buy a home?

Calculate the true numbers

To make your rent-vs-buy analysis accurate, you must compare similar home sizes in the same area.

For example, if your area's homes rent for $1.00 a square foot, then it will cost you about $2,400 to rent a 2,400 square-foot home. But if homes in the same area are selling for $130 per square foot, then to buy will cost you $312,000.

Your monthly house payment depends on how much you put down. If you put 5% down, you are financing $296,400. At an interest rate of 5.5%, your monthly payment is $1,808, or about $2,513 adding in property taxes at a taxable rate of two percent.

Even though you're paying slightly more to buy than rent the same property, you'll typically earn $37,883 in equity in just five years just by paying your mortgage down.

To calculate these numbers yourself, Click here

One of the disadvantages of renting is that rents can go up. If you get a fixed-rate mortgage, your costs will stay the same, although hazard insurance and property taxes can rise. However, rental insurance can rise, too.

Last but not least, you'll spend $150,780 including taxes on your home in five years, or you can spend $144,000 on the same amount of rent, pocketing $6,780. But with zero deductions, you'll lose the 2% a year in property tax deductions or $6,240 annually, or an additional $31,200 over the five-year period.

Renting is a convenience, and a great hedge when property prices are spiraling downward, but for long-term gain, tax benefits and equity is a better bet.

To find out what rents and sales prices are per square foot in your area, ask your real estate professional. He or she can provide you with a rent VS buy analysis customized for you and your budget.

Rate this item
(8 votes)

  About the author, Blanche Evans


  • Comment Link William Metzker Friday, 02 May 2014 7:25 pm posted by William Metzker

    For Mabel Alan: What would you think about buying a small condominium or, better yet, a townhome, and investing the balance in something very secure, such as CDs or FHLA bonds (government-backed)? You can list your home for sale with the caveat that you need an acceptable home to move into first, and you can make your offer on a new home subject to your present one closing.

    For renting-- $700,000 invested at 2% is just under $1,200 per month, so at least part of the rent would be offset. Right now, the $700,000 in your home isn't yielding anything.

    The choices aren't easy. I helped my mother through it all years ago and can see the time when I have to do it for myself (I'm 66). Do you have a financial advisor? We had Wells Fargo Private Client Services, and they were wonderful and reasonable. But some qualified person with a calculator could help you, and your bank is a good place to start because they wont cheat you. I don't like AARP all that much, but their references may be okay, too.

    Best to you and I hope it works out.

  • Comment Link Mabel Allen Friday, 02 May 2014 3:35 pm posted by Mabel Allen

    What do you advise for an 80 year-old retired woman living alone on Social Security who owns her large, older home valued at $700,00 or so free and clear but has to hire people for home repairs, maintenance, gardening, etc.?

    Would like to downsize but my hesitation in renting is loss of control over how long I can stay any one place and how much rents may increase. Plus, I am limited to locating in Southern Calif. which is expensive. I'm in good health and would need a garage and laundry hookups in my home.

  • Comment Link Matt Friday, 02 May 2014 9:40 am posted by Matt

    Long term real estate ownership is by far more favorable. This last housing bubble scared everyone half to death but we should have seen the writing on the wall. I wouldn't be worried about the 20% down payment not making money. Housing, in general, rises much faster than inflation. You are not making this money on just the 20% down, but the full 100% of the home. It's a win win for homeowners who plan to stay put.

  • Comment Link Andrew Thursday, 01 May 2014 9:35 pm posted by Andrew

    Owning a home is much more expensive than the difference between the cost to rent versus the cost to buy. There are a lot of additional factors to take into consideration such as the upkeep and associated costs; depending on the condition of the home and how many things you can fix on your own will play a major role. Finally, remember, the tax deductions for mortgage interest and property taxes are an adjustment to your gross income and not the dollar amount of tax savings.

  • Comment Link Glen Howard Thursday, 01 May 2014 2:28 pm posted by Glen Howard

    You bring up some excellent points in renting versus ownership. What is ignored in your article is the cost of the money that must be tied up as equity in your down payment to own a home. In California and other expensive states where home prices are more like $700 to $1000 per square foot to purchase a home and the down payment is often 20% to get a super jumbo loan, a buyer has to invest significant capital which could be earning a 5% or greater rate of return on an alternative investment in an equity or bond portfolio. In my own personal experience, renting was much more favorable financially because there are no front or back-end transaction costs to purchase or sell, no on-going property taxes, no repair costs BUT most importantly I can earn a predictable 7% yield on the equity dollars I did not have to tie up in the home as a down payment. Furthermore, the tax incentive (interest deduction on mortgage payments) phases out quickly above a certain income level so home ownership becomes less attractive. That said, I will admit that the major downside to renting is the unpredictability of the Landlord which you cannot control beyond the term of your lease.

  • Comment Link Lee Handsel Thursday, 01 May 2014 10:05 am posted by Lee Handsel

    Nice article and will be helpful with those buyers that are on the fence.
    Unfortunately the links in the article do not work.

  • Comment Link Larry Thursday, 01 May 2014 8:21 am posted by Larry

    Not many, if any, can get a loan with only 5% down these days. This is a huge barrier for consumers.
    Another factor is how long someone plans to be in the home. Generally it will be more expensive to purchase a home and stay in it for just a few years.

  • Comment Link Bill Metzker Wednesday, 30 April 2014 11:17 am posted by Bill Metzker

    This is misleading because it ignores maintenance costs. Some of these are large, such as a furnace, and need to be added to the basis of the house. Some are routine, such as leaky plumbing, which a landlord would fix but a homeowner pays for. Finally, more than 70% of taxpayers use the standard deduction, so the so-called tax benefits are only available to those who itemize.

  • Comment Link Mary Jo Gray Wednesday, 30 April 2014 6:07 am posted by Mary Jo Gray

    Very good article!

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.
Start Growing Loyal Leads!