The question to rent or buy a home is always a great one. There are many calculators on the web that compute all sorts of things, including depreciation, appreciation, tax deductions, etc. But none of these calculators factor in the flexibility of renting and the financial advantages you can have if you rent.
If you rent and take advantage of its perks, you can be farther along the path of financial freedom than if you buy.
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Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
There Are Many Advantages to Renting
- You only “buy” the space you need, when you need it
- You can be mobile and have shorter commutes
- No maintenance costs
- You pay only a fraction of the costs for many amenities, including a swimming pool, workout room, party room, etc.
- You can live close to wherever you want
- You can choose the neighborhood you want to live in, every year
There Are a Few Disadvantages of Renting
- You cannot make a lot of noise in a multifamily building
- You cannot have the pet you want
- You cannot have the colors you want
- You do not get to write off interest/rent
- You can be asked to leave, through no fault of your own
Now let’s look at some factors that you might consider when making the decision to buy or rent.
Factors That Play into the Decision to Buy or Rent
1. Starting a Career and Commuting Costs
When you are just starting a career, especially if it using a science degree, you need to move to different companies if you want to propel your salary. You need different experiences, and each successive company will pay you quite a bit more. It is not unusual to get an average of 10% annual pay increases when you move around for the first five years or so.
Most companies like to hand out 2% raises, and after a couple years, you need to move. If you are renting and find a job across town, you can move closer and get a shorter commute. If you own a home, your extra commute costs will eat up any pay advantage you might get.
Taking into account a 30 minute longer commute vs. renting across the street from work, that is like getting a ~10% pay cut living further to work. And if you factor in the driving expenses, it is an even larger pay cut.
And do not forget, some careers are not the fun and joy you were expecting in college. You might get laid off or go back to school. If you own a home, you could lose it.
If the career is what you want to excel in, spend the extra time at work getting recognized and promoted, rather than commuting. Or start a business. Do not spend your free time on home maintenance or commuting.
Advantage: Renting. You are better off saving your money and buying a home when you have a more stable career. Use your early energy maximizing your potential to earn, not spend.
2. Starting a Family
Most people out of college are starting to dream the American dream (from the 50s…). They look for a spouse to marry, buy a home and have some children. The fact is most marriages end in divorce (the others end in death, another bad option…).
A divorce for you is a godsend to me, as real estate investor. No one will make the mortgage payments or make any repairs, for fear the spouse will get a better deal. Soon the property is in foreclosure, and I am making money off your misfortune.
Advantage: Renting. Rent a place until you have a more stable relationship.
3. Housing Quality
When you are buying your first home, odds are you do not have much money: not for a down payment or a monthly payment. You will likely buy in a less expensive neighborhood, likely an older home that needs a higher maintenance budget.
You are young and like to work out, so you join a “fitness club.” You are spending so much time and money on home maintenance, you do not have time to go to the “club,” and your health suffers. No one factors in the extra cost of the health club as part of owning, which is included in many nice apartment complexes. They also do not factor in the higher maintenance costs on older first-time buyer homes.
Advantage: Renting. You are better off saving your money and waiting until you can afford to buy a newer home with less maintenance. And then buy an exercise bicycle to put in the extra bedroom.
4. The Cost of Crime
When you are younger, you likely want some toys to play with. You do not have much money for travel (remember, you just bought a high maintenance home), so you do things close to home. You have a expensive toys, like a bicycle, or other things in your garage. If you own property in a lower priced neighborhood, the crime rate is likely to be higher than a nicer apartment building in an upper scale area.
Property crimes, such as getting a bicycle stolen, are common. No one factors in the cost of these potential expenses.
Advantage: Renting. You are better off saving your money and waiting until you can afford to buy a home in a lower crime neighborhood.
5. The Cost of Moving
If you own a home, and you purchased it early in your life, at some point it will not be good enough. The changes in your life now demand a different place to live. You may have a larger family, you may want a different school district, you may want a place you can plant a garden. Whatever it is, you need to buy a different place to live.
The fact is, every time you move, some fast talking realtor makes a commission. Some are as high as 7%. There are other selling costs, such as paying the buyer’s closing costs, deed taxes, title fees, etc. It is not unusual to pay 10% of the selling price of the home on expenses.
If you bought in a less expensive neighborhood and now want to upgrade, it is going to cost plenty.
Advantage: Renting. You can move for a minimal cost, especially if you are traveling light. Wait until your life is more established to buy a permanent home.
Everyone likes to talk about appreciation when they talk about real estate. Home prices have to go up, as they have done since the first cave was carved out. Historically, real estate price appreciation is slightly over the rate of inflation.
Are prices going up from here? Some analyses say prices may go down, as prices follow income trends. Or prices may go down, as interest rates climb. Or prices may go down, as expenses such as taxes go up.
Who knows what real estate prices will do, but you need to factor in any selling expenses that you must pay to capture that appreciation. You do not get appreciation until you sell. There are still plenty of people waiting for appreciation from 10+ years ago. Will real estate appreciation beat stock market appreciation? It is likely it will not.
Advantage: Renting. You are better off saving your money and investing it in higher yielding investments.
Are you on Team Rent or Team Buy? Why?
Join in the conversation below!