Should You Buy or Rent a Home

That question isn’t as easily answered as you might think. There are advantages and disadvantages to both. We’re going to examine what those are so you can make a wise decision based on your particular situation.

Obviously, you shouldn’t buy a house if you can’t afford it. But, how do you know if you can afford it? DO NOT offhandedly assume it will cost you less to own than to rent or the other way around. Do a care analysis of your finances, tax bracket, and income stability before you draw any conclusions.

If you buy a home, you have the following costs and disadvantages:

1. The mortgage payment, for the first 5 years is almost all interest (think rent for money borrowed).
2. Maintenance costs have to be factored in and those will be about 1-3% of the homes market value. Even if you’re handy around the house and can do most of the repairs yourself, you need to calculate the value of your time. Remember, time is your most valuable asset. If you don’t keep the house in good repair, it’ll cost you big time baby. You’re going to end up with one giant expense at some time as in when the leaky water pipe finally bursts and wreaks havoc, the termites finally manage to chew through your deck and somebody gets hurt, or that leaky roof rots the roof’s sheathing and that all needs to be replaced. I could go on and on about this, but I think you get the idea. Even if you do keep the home in good repair, time and wear alone create both small and large restoration expenses.
3. You have the privilege of paying property taxes
4. Your homeowner’s insurance is much more expensive than renter’s insurance.
5. You’re locked into long-term debt.
6. You may not be able to sell the home quickly in the event your job turns sour, you are forced to relocate, or your financial situation takes a negative turn.

If you buy a home, you have the following advantages:

1. Except for any covenants that pass with the property, you can customize the home to your liking.
2. You can potentially make a profit on the home when you sell it. Of course, this is going to depend on how much you paid in the first place, how much property values increase, and if you have to discount the home for a quick sale..
3. You can usually write off the interest portion of your mortgage payment on your income taxes.
4. You don’t run the risk of someone telling you that you have to move at the end of a lease.
5. Your payments won’t go up unless you’ve been foolish and committed to an adjustable rate mortgage. (If you’re buying a home with the intent of staying put, don’t commit yourself to the uncertainty of an ARM. (No matter what the person trying to sell you the property tells you.)

If you rent a home, you have the following costs and disadvantages:

1. The home is not yours and you need to get permission from the landlord to paint or make changes to it.
2. Your rent in most cases (there are exceptions) will not be a deductible expense on your income taxes.
3. Your rent can go up.
4. Your landlord may drag his or her feet in making necessary repairs.
5. You may be forced to move when your lease is up.
6. You have no opportunity to make a profit from the home since you don’t own it. (I bet you already figured that out.)
7. You might have to allow periodic property inspections as part of your lease agreement.
8. If the home you rent is an apartment, you may also have unpleasant neighbors living really, really close by.

If you rent a home, you have the following advantages:

1. Usually you have no long-term commitment. Sometimes leases can be on a week-to-week or month to month basis. More often, they are set up annually. This is a much smaller financial commitment than 15 – 30 years. This is particularly important if you anticipate a job change or relocation. It’s critically important if you lose your job and this unfortunately, you may not be able to predict.
2. If something goes wrong with the home, it’s normally not your responsibility to repair it. (However, there are agreements set up where the tenant is responsible for minor repairs.)
3. Renting can save you the time you invest in repairs and maintenance. This time can then be invested in ventures that are more profitable.
4. If your financial situation changes and you can no longer afford the rent, you might be able to negotiate with the landlord to let you out of your lease agreement. That is, providing you have kept up on your rents, haven’t damaged the home, and have kept it clean. A landlord would much rather you be gone so the home can be re-let rather than you staying and not be able to pay your rent. (If you don’t pay your rent, they’re going to have to boot you out anyway.) The minute you are aware of financial difficulties, contact the landlord or property manager, explain what’s happening, and ask to be let out of the lease. They will tend to be more agreeable if the market is good (they can re-let the property quickly) and you haven’t been a slob that’s going to cost them money to get the house ready to rent.
5. If they get testy with you, you might be able to sublet your rental to someone else providing there are no provisions in your lease stating otherwise. Bear in mind though, you are still responsible for the rent and condition of the rental. BE CAREFUL if you decide to go that route.

As you can see, there are advantages and disadvantages to both leasing and buying a home. I would recommend buying a home if you have a stable income and can afford a home in a location that promises a good return on your investment. Also, the sizable tax advantage can make this option a big plus.

Unless there are extenuating circumstances (like a killer deal on a house you can turn quickly for a good profit), I would recommend renting if, 1. Your income is not stable or 2. You plan on a job or career change within the next few years. Remember, the mortgage company doesn’t care where you live as long as the mortgage payment is made. I know people who purchased a home only to find shortly that they had to relocate. They decided to rent their home with the intent of moving back in the future. They reasoned that tenants would help make the mortgage payment until they returned. The results were disastrous. Tenants damaged the home creating sizable repair costs. In addition there was this little thing called vacancy factor (That’s when the home is between tenants.) that they hadn’t considered. They ended up having to cough up the mortgage payments and the repair costs with no rental income to help. This was an ugly financial scenario for them and it can be ugly for you too. Avoid it if possible.

If the market is tight and you need to move before your house sells or you want to keep the house, get the biggest, meanest, nastiest, most aggressive property manager you can find to take care of the home for you. I’ve known quite a few of these guys (and yes, they’re usually guys) and they have a habit of intimidating tenants and homeowners alike, but they’re worth the management fees and abuse. They will do the best job of protecting your investment. Even so, I would advise setting aside at least three months of mortgage payment in case of emergency repairs or a longer than expected vacancy.

I hope I have given you some points to ponder. If you have any questions, leave a comment or send me an Email. In the meantime, have a great June. It’s raining here in Washington where I live. Can you believe it?