Buy Vs. Rent
Is it the time of the year when you have to renew your rental lease. Are you confused if you should rent or buy?
This is not a very easy decision to make. This is one of the complicated decisions you will have to make as an adult. I wish there was a clear way to make a decision on buying vs. renting. There are several factors that need to be considered when you decide to buy as opposed to renting. Some of the key things to consider when you decide to buy are:
- Do you have enough money saved up to make a down payment?
- How much monthly payment can you afford to make on a house?
- How long do you plan on living in the house?
- Do you want to buy an independent house or a condo or a townhouse?
The decision on buying vs. renting for us was relatively easier. We had been renting a one bedroom apartment for over 6 years. We like having guest over at our house, but it gets difficult to accommodate guests when you just have a one bedroom apartment. So, we were thinking of scaling up from a 1 bedroom apartment to a 3 bedroom apartment. The rent for which was almost going to be twice of what we were currently paying. This was around 2013. This was when there were a lot of advertisements on the television stating that the interest rates were at an all-time low and the property prices had become pretty cheap and that it was the right time to buy a house before the property prices started going up again. So, we just went into websites like Zillow, trulia, redfin etc. and started looking at home prices with 3 bedrooms and realized that if we bought a 3 bedroom townhouse with a reasonable down payment we would end up paying less monthly payment including principal, interest, property taxes and HOA. This is what helped us make the decision from renting to buying.
We understand that this might not always be the case in all markets. In some markets where the property prices are significantly higher you might not be able to do a direct comparison between renting and buying because renting might mostly turn out to be cheaper than buying. But, in instances like that you would have to consider other factors. You need to understand that when you rent a property you are giving away money to someone else and helping them build equity on their house. Whereas if you bought a house and made monthly payments you are building equity in your own house. So, when you go to sell the property you get the money back that you put into the house. Below is an illustration to help understand this concept.
Let’s say you are renting a 2 bedroom condo for $1500 a month for 5 years. At the end of 5 years assuming the rent has stayed the same, which is rarely the case, you would have ended up paying $60,000 towards rent. This is the money you have basically given away to someone else to build equity and you cannot even claim a tax exemption on this money. Whereas, for the same $1500 each month you could have bought a house worth $250,000 with as low as 3% down, 4% interest rate and a 30 year loan with a property tax of around $4,000 (You can use a simple mortgage calculator available on the internet to be able to calculate these figures). In the same 5 years you would have built a total equity in the house of approximately $23,000 that is not accounting for the $7,500 in equity that you would have already built through your down payment. So even if we assume that the property does not appreciate in the 5 years you had owned the property, you will still be able make money when you sell the property as opposed to having lost all the money you paid in rent. In addition, you also get tax benefits for owning a house. You will be able to claim tax deduction for the interest you have paid towards your mortgage and the property taxes that you have paid. Whereas when you rent you can’t claim any tax deductions on the rent you pay. The amount of equity you build exponentially goes up as you go down on the years of mortgage. But, of course your monthly payment will also go up. So, you will have to weigh all of this to figure out what is the right option for you.
As mentioned earlier buying vs. renting decision is not an easy one to make. It differs based on everyone’s unique situation. With the ideas provided in this blog you will be able to make an informed decision on buying vs. renting based on your situation instead of being in the rut and just renewing your lease without thinking.
Add other considerations you had to make based on your situation when you were faced with this decision in the comments section below.