How to Make the Best Financial Decision: Renting vs Owning
“Paying rent is throwing money away!” “Why help to pay off your landlord’s mortgage when you can use the money to pay off your own mortgage!”
That is one side of the “rent versus own” debate. On the other side of the argument, you have those who say:
“Don’t buy a house; buying a house does not qualify as an investment!” “Why buy a home when it is cheaper to rent a home than to it is buy it?”
When listening to both sides of the controversy, it is easy to become confused and let that confusion paralyze you into inaction. But like most arguments, no one side is completely correct. Each side has a version of reality that is only true depending on your circumstances.
Before you can make a financially sound decision on whether to own or rent your home, you need to understand the issues. This is a decision that affects your future and financial well-being. It is vital that you fully appreciate the implications of whatever decisions you take.
Renting vs Owning: Factors to Consider
The main issues that determine if renting or owning is a better option for you are:
- How long you are planning to stay in a location. If you want the freedom to travel or you want to be able to move at a moment’s notice, you are better off renting, says Alltrade Property Management. But it makes more sense to own your own home if you have put down roots in one place.
- The state of the housing market is another major factor. If the market is booming, the value of homes will go up and people who own their own homes will benefit. But the reverse is also true. For renters, market forces can also push the rent beyond their reach.
- Your level of know-how in financial matters is also important. It takes more financial aptitude to become a high net worth renter than it takes to pay off the mortgage on a home. Even if renting is better, you should own your home if you are not a savvy investor.
- Lastly, you want to think of how much you know about home improvement projects or how handy you are in general. This will play a major role in your ability to maintain the home and improve its value by doing strategic renovations to the property.
The Pros of Owning
- Stable housing costs
As a homeowner, you have an exact idea of how much your mortgage payment is going to be from month to month if you have a fixed-rate mortgage. You can accurately predict how much you will need to keep the roof over your head. This is unlike what you get as a renter; the rental rate you pay depends on market forces.
- A more stable life
Given that the median homeowner spends around thirteen years in their home before they sell it, this introduces an element of stability that is good for your family. Also, people who own their own homes tend to want to marry and raise kids, which brings even more stability into their lives.
- A home is a store of wealth
Buying a home is a great way to preserve the value of money. A house will preserve the value of your money because property appreciation typically outpaces the rate of inflation. Compared to keeping your money in the bank, where its value will be eroded by inflation, you are better off investing that money in a house.
- Cheaper than renting
As long as you remain in your home for more than five years, owning is a lot better than renting. Depending on where you live, owning can be 35% – 50% cheaper than renting; that is if you stay up to seven years in your home. Homeowners save more money than renters, with far-reaching implications for a person’s overall ability to build wealth.
The Pros of Renting
- Renting can be cheaper
In cities where home prices are very high, renting is the better option. If you live in a city like San Francisco where the median home price is above $1 million and you need to earn a minimum of $250,000/year to buy even the cheapest home, you are better off renting.
- Renting gives you mobility
This is the most talked-about benefit of renting; you have a very flexible lifestyle. You can live in any city you want as long as you can afford the rent. Moreover, you don’t have to live in any one place for a long time. Unlike, when you own your own home, as a renter you don’t pay any penalties when you move.
- No home maintenance hassles
As a renter, the only housing costs you have are your rent and renter’s insurance. If the roof on the rental property starts to leak, it is not your problem to fix. You are not burdened with all the maintenance issues landlords have to deal with. For people who want a less stressful life, renting offers a better alternative.