Renting Real Estate Vs Buying
At least once a week I encounter a client who is weighing the pros and cons of renting versus buying Real Estate. Unfortunately there is no formula or analysis that works for every individual, the decision whether to rent or buy must be made on a case by case basis because the process requires a very subjective weighing of pros and cons. As the housing market crash recently taught us, buying a home is not always the best option for every individual. Here is my best attempt to help with the decision of whether to buy or rent Real Estate.
Let's start with a few concrete laws:
- If you are unsure about the stability of your job DO NOT BUY, renting is the only sensible option for you. If you are comfortable with your job stability then the home buying option is on the table.
- There are calculators and formulas that can help analyze wherever it makes more sense to buy or rent in a particular city based on current economic conditions. These are helpful but they do not factor in all of the subject elements listed below. The numbers alone are not determinative.
Renting Real Estate – Pros and Cons
- PRO – Renting requires a reliably small initial outlay of money. Most rentals require only first, last, and security deposit. This is dramatically less that buying a home and the security deposit is returned if the property is left in good condition at move out.
- PRO – Renting does not require a long term commitment. Most leases are for 12 months and then they either automatically renew or terminate.
- PRO – Renting allows you the opportunity to familiarize yourself with one or multiple neighborhoods in a city before making a long term commitment to one.
- PRO – Economic and housing markets do not really affect renters. Rents may go up slowly or down slowly but things like decreasing home values, under water mortgages and shadow inventory are not important to renters.
- PRO – Renters do not have to allocate money for annual repairs.
- PRO- Renting a home is a quick process that typically takes 2-3 weeks total.
- PRO – Renters do not pay real estate taxes or worry about real estate tax hikes
- CON – Renters have limited control over the property and the condition of the property they live in.
- CON – Renters do not build any equity in a home. The entire monthly payment goes to the landlord.
- CON – Renting is not a long term solution for most individuals.
- CON – There are no tax deduction benefits for renters
Buying Real Estate – Pros and Cons
- PRO – Buying Real Estate affords the buyer 100% control over the property. If the owner is unhappy with the condition he or she can make alterations as desired.
- PRO – Interest rates are historically low.
- PRO – When you buy a home some portion of the monthly mortgage payment goes towards equity in the home.
- PRO – Buyers are entitled to significant tax deductions for mortgage interest and depreciation.
- CON – Buyers must allocate money for annual repairs
- CON – Buying a home is a long process compared to renting. The average home purchase takes 30-60 days.
- CON – Buying requires a long term commitment. In most cases the buyer should plan on owning the property for 5 years or longer.
- CON – Buyers pay real estate taxes and face risk of annual increases
It's easy to understand the difficulties clients encounter when deciding whether to rent or buy Real Estate. At the end of the day there's really no right or wrong answer, only what makes sense for an individual with a specific set of circumstances.
