Is it better to buy or rent

when it comes to Real Estate?

The question of whether you should buy a home or rent is one that has been asked for years. Your parents, grandparents, or even friends and coworkers, may be encouraging you to purchase a home and stop paying rent. After all, that is what many of our parents and grandparents did, right? However, times change and the markets today are  much different than markets we’ve seen in the past.

So, the question still remains, is it better to buy a home rather than continuing to pay rent? The truth is, it’s a personal decision that is completely up to you to decide. It all depends on your individual situation, wants, and needs. Even as professional real estate agents, a business that relies on those who buy and sell homes, we will not tell you that homeownership is the right decision for you unless it makes sense. What we do is provide you with all the information, outlining positives and negatives to each situation, so that you can make an informed and educated decision about your future. We then take an objective look at each option to determine the best fit for you.

Positives and Negatives of Renting

The biggest benefit that renting affords you is flexibility. This is especially true if you are in a month-to-month lease. With renting, you can easily pick up and move somewhere else with little to no costs. You may have to give up your security deposit or need to hire movers, but this cost is negligible in comparison with the costs of buying or selling a home. Renting also means that you don’t have to deal with maintenance. If something breaks or is in need of repair, your landlord deals with it (hopefully you have good management!). Lastly, renting can be less risky in the long term. While most markets will see home values appreciate over time, there is no guarantee of this. Renting means that you are not “invested” in the real estate market so are not susceptible to the swings in value.

Now let’s look at the disadvantages of renting. You’ll notice in the previous paragraph we mentioned that renting can be less risky as you avoid the possibility of owning a depreciating asset. The flipside to this is that you are not in control of rents and you can face monthly or yearly payment increases. Another disadvantage of renting is that you are very limited as to what you can do with the property as far as any changes or renovations. Some landlords may allow you to paint your apartment or make some small changes with their permission and approval, but you will find that most do not allow this. When renting, you also do not receive any tax benefits like you do with owning a home and you do not build any equity in your own property. Not building any equity as you live in the property is seen as the biggest downside to renting. Even if you have lived in the same place for multiple years, when you end up moving out, you are left with nothing and all of your rent payments have gone to paying your landlord’s mortgage or lining their pockets with extra cash.

Positives and Negatives of Owning a Home

What most people think of when they are looking at the benefits of homeownership is increased equity over time. Equity is the portion of the value of the home that you “own”. Even though you own the home, if you have used any sort of financing for the purchase, you are then making monthly mortgage payments to pay off the loan, and with each payment are building your equity.

One way to look at it, is to think of paying “rent” to yourself with each mortgage payment. Owning your home also give you the flexibility to make changes as you like. You no longer need the approval of a landlord to paint the walls or do renovations such as adding a new bathroom. Owning a home can give you a more predictable and stable cost of living as well. Once you have settled into your home, if you have a fixed-rate mortgage, your payments will stay the same over the lifetime of the loan. Lastly, owning a home gives you the opportunity to take advantage of many tax breaks and can also be used as an investment. Unlike renting, if you are looking to move when you own your home, you have the option of keeping the property and using it as a rental for added income. For a more in-depth look, check out this blog post, which goes into greater detail on the benefits of homeownership.

Although there are many positives to owning a home, there are, of course, downsides.  The first disadvantage of owning a home is that it requires a large upfront cost in order to be able to purchase a home. You are also responsible for a lot of monthly and yearly costs such as property taxes, homeowner’s insurance, and maintenance that you do not have to worry about when renting. Relocating can be more difficult when you own a home, as properties are illiquid assets and can sometimes take time to sell. Lastly, although most markets have seen home prices increase historically, there are no guarantees that your home will increase in value and there are always risks that it could depreciate instead.

Now that we have laid out the advantages and disadvantages of renting and owning a home, there are several major questions that you want to ask yourself as you are evaluating each option as the right fit for your situation:

1. How long do you expect to live in the area?
2. What are your plans for the future?
3. Do you have the financial ability to purchase a home?

Questions 1 and 2 are very important because it is good to have an idea of your long term goals before you dive into purchasing a home. If you only plan on living in a certain area for a short period of time, it may not make sense to buy with all of the transaction costs involved. However, if you do have long term plans to stay in an area, purchasing may be a much better option when looking at the numbers. Question 3 is important, as well, because there are many people who do not think that they are able to buy a home. If you are interested in becoming a homeowner, we would strongly encourage you to reach out and meet with a lender. Some lenders are able to offer creative solutions depending on your situation and if you are not able to qualify for a loan at the present time, they will be able to set you in the right direction to improving your credit, building up your bank account, or paying down certain pre-existing payments so that you can qualify in the future.

Now, let’s take a look at what costs you’ll need to keep in mind when comparing the long term value of each option.

Down Payment

This is the portion of the purchase price that is paid upfront. This is typically 20% of the home’s purchase price, although there are many loan products that allow for lower down payments.

Buying Closing Costs

These costs can include, but are not limited to, loan origination fees, points, title insurance, appraisal, escrow deposit, fees and other closing costs.

Annual Property Tax

The payment amount varies by location but is important to keep taxes in mind when calculating all the costs of homeownership.

Utility Costs

These are the costs incurred for utilities such as electric, gas, water, sewage, trash, etc.

Homeowners Association and Condo Fees

If the home you are considering purchasing is in a community or building that has homeowners association fees, it is important to keep these in mind when calculating the cost of ownership.

Homeowners Insurance

This is required by most lenders as a condition for the loan. It is also highly recommended to have some form of insurance coverage for your home. These costs can be significantly higher if you are paying higher premiums for additional risks like floods, wildfires, or earthquakes.

Mortgage Term

This is the number of years until your mortgage is paid off if making regular payments. The length of time is typically 30 years, although there are other loan products with different terms available.

Private Mortgage Insurance (PMI)

This is an insurance fee typically required on loan products that allow down payments of less than 20%. It is a percentage of the original loan amount that is added to your monthly payment.

Renovations and Maintenance

Not only do homes require regular maintenance and upkeep, but during the time you own the home, you may also find yourself making renovations. A good way to estimate these costs is to take 1% of the home value annually, although this can be dramatically higher or lower depending on the extent of renovations or repairs. (i.e. A $100,000 home will cost you about $1,000 a year in maintenance/ renovations)

Appreciation

The dollar amount that your home is likely to increase in value each year.

Selling Closing Costs

Most homeowners do not live in the first home they buy for the rest of their lives and there comes a time when they will need to sell. It is important to keep these costs in mind when purchasing a home, as they are costs that you will incur on the sell side. These costs include transfer taxes, title insurance, real estate agents’ commissions and any other costs.

Discount Rate

This is the opportunity cost of your money, or rather, what your money would earn if you were to save or invest it.

Inflation

The rate at which your costs are projected to increase each year.

Rent Appreciation

Similar to inflation, this is an estimate of the increasing rent over time.

Renters Insurance

Insurance policy to cover your personal possessions when renting. Note that this is not required, but often strongly recommended.  Some apartment buildings or landlords will require you to purchase renters insurance upon move-in.

As you can see, comparing the costs of homeownership to renting can get quite complicated with all of the different variables in play. The New York Times has a fantastic “calculator” available on their website that can assist you with determining which housing fit may be better for you in your market (Rent Vs. Buy Calculator).

If you are tired of renting and paying someone else’s mortgage instead of your own, reach out to us! We are always happy to meet with individuals interested in learning more about the benefits of homeownership and discussing the options that may work best for your personal situation.  We look forward to assisting those with real estate needs across the United States, and are eager to help you in achieving your real estate goals!

The above real estate information on Real Estate: Buying Vs. Renting was provided by John and Melissa Steele. John and Melissa can be reached at steelesandiegohomes@gmail.com or by phone at 619-887-4429.

Considering buying or selling a home? John and Melissa of Steele San Diego Homes have a passion for Real Estate and would love to share their expertise with you!

Steele San Diego Homes services all of San Diego county and also works with out of area clients to connect them with a strong local agent. Whether you’re interested in buying, selling, investing, or just want to learn more, John and Melissa Steele are here to help you.