The Rent vs Buy Argument

With my whole mold dilemma going on it has me revisiting the idea of buying.

I’ve been in the real estate business for about seven years now doing mainly rentals and I’ve always thought that buying and renting are personal decisions. For the most part they are, but with everything happening in my life right now, I’m leaning towards buying.

I’d say it’s also heavily dependent on your financial situation. For some, renting is the only option.

Here Are The Benefits Of Renting.

1)It’s Flexible.

I like the idea of having a lease that’s short term. Either 6 months, 1 year or 2 years, it’s nice to know that you’re not fully committed to a property. I can leave at the end of my lease if I’m unhappy or if it becomes too expensive. You can usually leave mid-lease if you’re able to find a takeover tenant that qualifies. Overall, I believe that the flexibility is great for people who travel for their job, relocate or need something that offers financial flexibility. (Example: if you work on commission and earnings change year to year)

2)Initial Costs Are Low.

Most of the time you can find an apartment without a broker by contacting the property management directly. Websites like Apartments.com, Zillow and Trulia make this possible.

Even if you have to pay a brokers fee, it’s usually no more than 1 months rent. Up front fees include security deposit which could be as low as $500 to 2+ months of rent.

Compare that to your closing costs which are 2%-5% of a homes value plus a 20% down payment! Not everyone has that kind of money available.

3) Allows You To Stay Liquid.

And that brings me to my next point, if you’re you’re able to put together a down payment and closing costs, that means you have the financial opportunity to pursue other investments.

Generally it’s said that a home isn’t a good investment. The only value you really get is a roof over your head at a somewhat stable cost. It gains an average of 4-6% value each year depending on your location and that’s with inflation plus the updates you’ll need to put into it. Compare that to the stock market, the Dow Jones historically has gained 8-9% each year. So stock would be a better return but is more volatile than buying a home.

Pitfalls To Renting

1) Neighbors

Generally, you’re not in control of who your neighbors are and they are a lot closer to you when you’re renting. Renters usually are in apartment buildings where neighbors are sharing walls and tight living quarters. If you buy, you can choose the neighborhood and even a property that is more isolated with less risk of a nuisance neighbor.

2) Absentee Landlord.

The owner of a rental is obligated to make the apartment habitable and make reasonable repairs to the apartment. Somehow that doesn’t motivate some management companies to act correctly and do basic work like fixing leaky pipes or sealing drafty windows. I would say most landlords, even those with massive wealth, would rather wait for the attorney letter demanding repairs than make major repairs of their own free will. Repairs tend to cut into their profit and they hate that.

The Benefits To Buying

1) Tax Incentives

The tax incentives for buying a home and getting a mortgage are pretty nice. It’s almost like a rebate on part of your purchase, that’s how good of an incentive it is. You can write off your closing costs, mortgage interest, and any major repairs on your house. My dad once told me his housing tax incentive was equivalent to a $6000 tax credit.

It’s also a great way to shield your income from tax obligations if you’re in a higher tax bracket.

2) Control Over The Property

As I learned with my whole mold situation, I have no control over my environment as a renter. Mold is literally growing underneath my floorboards and I had no idea and no control. When issues arise, the landlord can choose how they want to fix problems and sometimes they go for the quick fix.

By owning a home, you have complete control over the property. And can choose the best and most efficient option to repair. You can do your own repairs, if you’re skilled enough, and you can make changes to the finishes as you wish.

3) Building Equity

Like I mentioned before, buying a home isn’t the best option for an investment when you’re looking for a high return but you’re still building equity and personal wealth by paying off the principle of your mortgage.

There is some flexibility if you want to increase your liquidity for investments or capital ventures but they involve more risk. Once you’ve paid a significant enough percentage of your principal balance, you can apply to refinance and get a personal loan, apply for a line of credit against your home or for a second mortgage. This is a bit more risk, since defaulting could result in foreclosure, but this allows banks to lend money to you at a better and lower interest rate.

Pitfalls To Buying.

1) Fluctuating Costs

The nice thing about renting is that you always know what your rent is going to be. It’s not a surprise and any repairs that need to be done, the landlord is supposed to be able to fix. Housing costs for a renter should remain stable.

Compare that to a home, which depending on the condition you bought it in, may have some major renovation costs down the road.

My parents have owned their house since 1991 and I’ve watched them pour money into it like it was a bottomless pit. Over the 30 years they’ve owned their home they’ve done a bathroom renovation, built a bathroom out, windows replacements, insulation installments, kitchen demolition and renovation, roof work, landscaping each summer, boiler replacement, basement refinishing, installed backyard and front yard pavers, tree removal, central air installation and bought new laundry appliances. This is an exhaustive list.

After all that work, I don’t feel like my parents came out with much of a profit. There were definitely months where they had to go into debt or take loans to make these payments. They bought their home in 1991 for $190K and it’s probably worth $450-500K at this point. But with 30 years of inflation and renovation costs, it’s not a particularly great deal.

2) Less Flexibility

Because the initial costs to buy and sell a home are so high, including closing costs and broker fees, buying a home is impractical if you plan to move within 5 years.

A home is more of a long term investment just to break even with the costs.

If you’re a person that’s constantly relocating or unsure of where you’ll be in 5 years, renting is a better option.

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Overall, for me the choice seems to be leaning towards buying. The uncertainty of renting is starting to wear on me.

Buying is one the biggest financial decisions of your life so take your time and weigh all the options.

Here’s a great buy versus rent calculator. You can find out which is a financially better option. I’ve always used it to consider whether my apartment was a good deal.

Happy real estate shopping! 🙂

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