Most of us are not fortunate enough to be gifted a house by our parents. In the real world, we need to work hard for the things we need and want.
As they say, “adulting” is hard.
Buying a house is certainly a big decision to make and not one to be taken lightly. If picking the right piece of furniture for your living room already makes your head spin, deciding on whether or not to buy a house is certainly a puzzle for many would-be first-time home buyers.
Let’s weigh your options, shall we?
Before you begin house hunting, think about the stage of life where you are in right now.
- Are you single and mobile or newly married and in the family way?
- What is your financial standing? Are you paying off any personal or student loans?
- Are you in between jobs, planning a career change, or newly promoted?
- Are you thinking of moving to a different state, province, or country?
- What are your career and family goals?
Answering these questions will already give you an inkling on your decision. Buying or renting a house depends on your individual situation, preference, and decision.
The purpose of this article is to help you make a well-informed decision based on your lifestyle of choice, and financial goals.
What works for you, may not work for someone else and what works for the majority of the population may not necessarily work for you.
Again, it depends on your lifestyle choice and personal financial goals.
So, Is Buying Better Than Renting?
The decision of buying or renting a house, just like any other life decision comes with their own pros and cons; the goal is to first look into these advantages and disadvantages before finalizing your decision.
Buying Vs Renting A House
Buying a Home Gets You Into the Babit of Saving Money
Many first-time home-buyers get lured into buying their homes because they feel that they’re simply throwing away their hard-earned cash renting a house or an apartment.
Having decided that you are buying a home in the foreseeable future forces you to save money toward the down payment of your home. This forces you to distinguish the necessary from the unnecessary or the needs from the wants. If you get your daily boost of caffeine at Starbucks, you may decide to lessen your coffee shop trips and instead buy instant coffee for office coffee-breaks, on the road, or in the home.
If you’re an avid Starbucks (or Tim Horton’s) fan, you can always get your own branded (instant) coffee supply that you can prepare at home or in the office and yes, you can drink ‘em in style too in that Starbucks branded cup by investing in your own Starbucks thermos travel mug. I promise you’ll get that same Starbucks feeling at a cheaper cost.
You can pretty much twist all your spending using the same strategy to cut down on your monthly spending so you can set aside more toward the down payment of the house your plan to buy.
The upfront costs of buying a home is quite hefty; depending on where you are, a down payment for a home purchase ranges between 5 to 20 percent of the purchase price, plus give or take 2% on lawyer and closing costs.
If you’re buying a second-hand house, it’s also a good idea to invest in a home inspection which costs at least $250 for an inspector walk-through and around $500 for a complete home inspection report.
Preparing for these up-front costs will force you to save money on a consistent basis because you may not have $20,000 laying around, would you? Well, you may have it but not everyone would that’s why buying a home forces people to save up for a down payment and other incremental costs of the initial home purchase.
If you’re someone who never experienced saving money, this is a good experience for you because it lets you get into the vibe of saving money and not spending all your bi-weekly earnings.
I would suggest that you continue the habit after your home purchase!
Forced Savings through Equity Build-up
Home equity simply means how much of your home you actually own, and the goal is to own more of your home.
Let’s say you bought your home for $300,000 and made a 20% down payment of $60,000, then loaned the remaining $240,000. This means that you only own $60,000. The lender doesn’t own your home, but you used it as collateral for the loan. Let’s assume that your home doubles in value to $600,000, yet you still owe $240,000 only.
The difference is your home equity, which you can consider as part of your net worth.
You can take out a home equity loan, cash-out refinance, or get a second-mortgage should you need to access this built-up equity in your home.
Most people use their home equity to fund emergencies, home renovations, and to finance their kids’ university education; I would suggest that you build up a separate emergency and education funds so you need not dip into loans and credits to finance family emergencies and your kid’s university education.
Rather, I would advise that you instead use your home equity to purchase another property so you can rent out one and live on one; it’s really your choice, which one you choose to live on.
Generally, a home increases in value over time because of market forces that drive up your home’s value or improvements to the home.
But there are other ways to build equity…
If you plan to make a sizeable down payment at purchase, it increases your home equity instantly. If your goal is to pay it off fast; you may consider making extra payments toward the principal of your mortgage whenever you get a raise an increase in income.
Making renovations inside the house or improving curb appeal significantly improves your home’s value. Updating cabinetry, repainting to make the rooms brighter, or changing lights for a more modern look increases the value when it’s time to sell. And what’s great about this, is that these improvements don’t even have to cost much.
Increase in Net Worth
You can accumulate wealth from within your property as you build equity and your home appreciates in value. As mentioned, your home equity is an asset and forms part of your net worth which you can pass down to your heir either as a property or as a liquid asset if disposed of before or at the time of death.
When you own your home free and clear and you decide to sell it; you get 100% of the proceeds which equates to liquid asset or cash in the bank less any applicable capital gains and/or sales taxes depending on where you are (sale of a residential home has no capital gains tax in Canada).
Income Tax Savings
In the US, interest paid on first and second mortgages is tax-deductible, whereas rental payments aren’t.
In Canada, interest on mortgage payments is tax-deductible only if the property earns income. Most self-employed and business owners can also claim part of their mortgage interest if they use part of their home for business purposes. If your property does not earn income and is neither used for business purposes, you can not claim mortgage interest but there will be no capital gains when you sell.
Check with your accountant if you can qualify for a deduction of mortgage interest at tax time, as this depends on which part of the world you are in. In North America, interest on a home mortgage is generally tax-deductible.
Opportunity for Passive Income
Passive income refers to income coming from a source other than your salary or earned income. Rental income is a form of passive income. If your house is in a centrally located area, you can rent out your basement or a spare room as a full-rental suite (basement), as a student home-stay or as a short-term rental at sites like Airbnb.
Letting out your home to strangers depends on your comfort level of course and may generally be a risky endeavor, but screening your tenants well, and layout your terms and conditions at the onset minimizes the associated risks.
Your property’s passive income may cover your mortgage payments, which means that you get to live for free while building equity at the same time.
My friend and her husband currently rent an apartment in California, but they bought a house in Vegas which they plan to live on when they retire. While living in California, they rent out their house in Vegas, and their rental income pays for their rent in the apartment they live in which means they technically live for free.
Pride of Ownership
For generations, all across the world, owning a home is the ultimate dream for many. There is such pride in homeownership.
You are free to do whatever you want in and with your home (along the boundaries of the laws, of course), unlike a rental where you need to ask permission to paint the walls or drill holes to hang some picture frames or painting and you are free to bring home any pet(s) you may want.
Want an open space? Go ahead and tear down a wall to make your dining room and kitchen a free-flowing area.
In a nutshell, you have control over your living space. You get to make your space your own. There is no landlord to answer to. Your house, your rules.
There is also a sense of stability when owning a home as compared to renting. When your lease is up for renewal, there is always that fear of a rate hike, especially if you live in a highly condensed area. Your landlord can also unexpectedly sell the apartment building to make way for newer and modern condominiums. Such won’t be the case if you owned your home.
Social Benefits
Owning a home implies permanence, as opposed to those who are renting and therefore, more mobile, which is why friendships are fleeting.
Building long term relationships with your neighbors in the community you live in is more permanent. Interactions within your community provide the opportunity to build social capital.
When you belong to a community, you have the opportunity to plant down-solid social and economic roots, which could improve your economic well-being through the permanent social connections you’re able to build from within your community – your permanent home.
To a lot of people, this is far more important than the immediate dollar saving they feel whether or not they’re buying or renting their living space.
Renting Vs Buying a Home
Renting instead of buying? What are the advantages and how does it compare to owning?
Location Flexibility and Mobility
In the digital age that we now all live in, where the Millennials prefer a more nomadic lifestyle, mobility, and location flexibility is a major argument.
Renting frees you from being tied down to a house. This works well too, in a weak job market, because renters have the flexibility to move. In case your lease isn’t up, you can sublet your rental or your landlord may let you buy out of your lease.
You may also want to be closer to your place of work. This saves you from the long daily commutes, gives you extra minutes in bed because you don’t have to beat the traffic, and helps you save on gas.
Also, if you don’t plan on staying for the long-term, say, more than 5 years, it doesn’t make sense to buy a house. The costs would just be too high because the home and property values probably wouldn’t have appreciated well enough for you to cover all your closing costs and fees, and any improvements made.
Flexible Savings and Investment Strategy
Do you want to treat yourself to a Starbucks coffee? Go ahead!
When you are renting, you set aside a small portion of your monthly income for rent. In most cases, this is a significantly lower amount than the mortgage and utility costs of owning a house.
You can do whatever with the rest of your paycheck.
This month, you want to be more aggressive with your investment, and put 60% of your paycheck in mutual funds.
The following month, you see these amazingly low airfare rates to Cancun, and you click purchase for a weekend of sun, the beach, and tequila shots.
Renting doesn’t give you a valuable asset like a piece of property, but it still allows you to build wealth.
While the argument for buying a house is that it’s a great investment, you can do the same with renting.
The amount you spend for a down payment, monthly amortization, and the cost of owning a house (I will get to this later), can be put in high yielding investment outlets like the stock market.
Let your money grow from buying and selling blue-chip stocks, and from dividend earnings.
Take advantage of the bear market, and buy undervalued stocks, and make a huge profit once the market turns. Reinvesting your earnings, adding to your investments regularly, and diversifying your portfolio can easily outperform home equity.
What do I mean?
Wealth creation is not limited to owning a house. Plus you don’t have to deal with the hassle of mortgage payments and home maintenance.
Lower Monthly Out-flow
The cost of renting is significantly lower than the cost of buying a home.
In some cases, renters don’t have to pay for utilities, property taxes, and what not since their landlords take care of these and are all factored into the monthly rent amount.
When a pipe bursts or the furnace needs replacing, all the renter has to do is to call up his landlord and nothing more. Simple as that.
So what really are the true costs of owning a house that many are not aware of? Buying a house is not just simply paying for your monthly mortgage, property taxes, and insurance. There are also the closing costs which can account for 2%- 5% of a house’s sale price. As for the recurring costs, these are just some of it:
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- Utilities (water, electricity, internet, etc)
- Heat
- Condo or HOA fees
- Maintenance including repairs (routine checks for molds and pests)
- Trash and recycling
Repairs are unexpected and often happen at the worst possible moment. The solution to this is getting homeowners insurance, but you still need to pay a deductible when you make a claim. Thus, the best way is to always include repairs in your home budget so you have the cash to pay for repairs when it happens.
All these expenses are discouraging, but it’s best to have a clear picture at the onset. One rule of thumb that lenders follow is the housing debt-to-income ratio. The benchmark varies per lender but ranges from 28% to 36%, which means that your housing costs should not exceed 28% of your gross income. You stand to gain more by lowering this ratio to a more comfortable level of 25%. A lower ratio also gives you some leeway for additional or unexpected expenses along the way. For example, your gross income is $5000, you should only spend $1,400 ($5000 x 0.28) on your monthly mortgage.
Able to Rent in a Location That You Wouldn’t Normally Afford to Buy
Depending on where you want to live, renting can turn out to be a better option. Fast-rising home prices coupled with high mortgage rates have driven prospective buyers to rent. Some cities are significantly more expensive compared to the rest of the country. This makes the decision to buy or rent easier. Likewise, in an otherwise expensive neighborhood that you want to be part of, buying a house might be too expensive, but renting could be more feasible and affordable.
So, Is Buying Better Than Renting?
Calculator.net has a very helpful tool that can help you compute whether buying or renting is more practical for you at the moment. But again, it all depends on your specific life situation.
Renting does not necessarily equate to throwing away your money. You do get a roof over your head, right?
Buying a home is not for everyone. Many people still prefer the simplicity of renting because it gives them flexibility, and hardly any maintenance costs to deal with.
Buying or renting really depends on your lifestyle, goals, and financial capacity.
Of course, all this goes without saying that you buy a home that is well within your financial means.
As a first-time homebuyer, I wouldn’t suggest that you buy the most expensive home that you can get approved for as you will be headed to a financial disaster.
Just buy what you can economically afford. Don’t go out and buy your dream house just because your co-worker(s) bought theirs. Buy a house in a decent home that’s within your means in a safe neighborhood that you can raise a family.
Knowing when to buy, take your time when searching for homes, not rushing and buying in a buyer’s market, stacks the deck in your favor.
Finding a knowledgeable and reliable real estate broker that puts your benefits first before theirs will also help you out find the best deal in the real estate market that’s well within your means.
And last but not least, be prudent in your house hunting!
If in the event that you’re not sure that you can afford a house, chances are you can’t; so feel pressured to own a house right away. Take your time, and know when to buy.
