Buy or Rent? You Decide.

‘Should we purchase our first home or continue renting?’  A question that could potentially lead to the largest financial obligation of your life to date: property ownership.  The ‘buy vs rent’ debate is getting increasingly heated as financial professionals weigh the benefits of each. We know young professionals are delaying purchasing a home due to their generations financial experiences.  The average college graduate has nearly $30,000 of student loan debt and lacks the savings requirement needed for a down payment on a house. Millennials and Generation Z face different financial difficulties compared to Baby Boomers and Gen X.  The question of ‘buy vs. rent’ didn’t really exist in our parents’ generation, and now it’s one of the most common questions we hear today.

Our parents raised us to believe that purchasing a home is the best thing we can do for ourselves along with going to college, getting married, and having kids.  So why deviate from the path that’s so traditionally paved? Well, things don’t always turn out to be as great as we hoped for. Not only that, no one can tell you which outcome (buy vs. rent) will put you further ahead in the end.  What we can do is provide insight on the pros and cons of buying and renting and ultimately guide you to make the best decision for you.

Buying a Home

Pros

  • Purchasing a home allows for the possibility of price appreciation.  If your home appreciates in value and you sell it, the difference in selling price and purchase price will be cash in your pocket.
  • You own your home, which means you are in complete control!  This means no landlord to answer to, no untimely inspection notices, and not needing permission for painting the walls Edgecomb Gray.
  • Owning a home provides stability.  That stability may be because of its location or the community.  This reason alone is a major attraction for homebuyers.

Cons

  • Buying a home is expensive.  Lenders require a down payment, or an amount to pay the bank upfront as a percentage of the home value.  The traditional guideline for a downpayment is 20%, however, lenders accept down payments as low as 3%.
  • Home ownership does not always lead to profit.  I’m sure a lot of readers think to themselves, “I get that….but mine will grow.”  There is always a possibility that your home may lose value.  If you are looking to sell and the housing market happens to crash (remember 2008?) then unfortunately your timing may lead to a significant loss.  
  • Let’s say you exhausted your savings to make your initial down payment.  You move in thinking you’ve made a sound financial decision…but wait, your roof has a leak and needs to get replaced!  That right there may cost you an additional $10,000. If you’ve exhausted all of your savings for the purchase, now what do you do for these unexpected maintenance costs?  A homeowner’s savings account after the purchase should always maintain a healthy balance to cover unexpected expenses that you are now on the hook for.
  • Remember, your home is not a retirement plan. Some homeowners become house poor and the only funds for retirement are in the home and illiquid.

Renting a Home

Pros

  • Remember how I said some people look for stability in their lives?  Well, some people are also looking for greater flexibility. Your lifestyle and goals play an important factor in deciding to rent or buy.  For example, if you are relocating for a new job across the country, then take your time to figure out where you want to plant your roots. Purchasing a home right away does not make sense in this case.  Do you work virtually and have the flexibility to travel the country over a long timeframe? Then hold off on purchasing your home.
  • Renting allows you to avoid responsibility for any maintenance.  As a renter, your landlord and property management team are responsible for fixing any issues such as a leaky faucet or needing a new appliance such as an oven or refrigerator.
  • Renting also allows you to avoid additional costs that you would incur when owning a home.  As a homeowner, you are responsible for paying property taxes, but when you rent you don’t have to make these payments.

Cons

  • Rental prices are not stable, meaning your monthly rent is subject to fluctuation based on the terms of your lease.  Your landlord has the ability to increase prices based on the local market and tenant occupancy (but don’t forget your ability to negotiate these rates!)
  • As a renter you are not able to build equity in your property.  Equity is simply the difference between what you owe and how much your house is worth (hopefully that figure is positive!).  As a homeowner your equity builds as you pay down your mortgage principal and/or your property value increases..  

Natalie and I purchased our first home after getting married in 2016.  Our decision to buy a home most likely stemmed from the desire to take a traditional path in life; get married and then buy a home before having kids (by the way, there are other items to prioritize after getting married). 

Our experience was eye opening, to say the least.  We (yes, two financial experts) didn’t factor in the costs of surprise home repairs and additional maintenance.  Not only that, but the weekly trips to Home Depot and department furniture stores added up fast. Despite all of that, Natalie received a job offer 1,700 miles away from our newly purchased home, which we sold after owning it for roughly a year.  In hindsight, we should have continued renting for that year and saved money, but hindsight is 20/20. We’ve had the opportunity to learn the realities of home ownership and renting. In our opinion, you don’t need to own a home to be financially stable.  You also don’t need to rent to enjoy a life of flexibility. You can have both (or none!) in either environment. 

Buying a home or renting is ultimately dependent on your unique situation. The decision is dependent on your needs, life goals, and desires. You may be renting in a specific neighborhood that checks all the boxes for you (school district, community, restaurants, coffee shops, and biking trails).  You may decide to purchase a home because it provides a sense of community you didn’t have growing up. The debate on whether owning your home or renting will likely exist even after our lifetime. Remember, our personal biases and experiences tend to play a role in determining what side of the table we sit on.  Understanding the advantages and disadvantages allows you to make the best decision for – you.

Written by: Dan Slagle, CFP® with Fyooz Financial Planning

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