July 26, 2010, 6:00 am

Buying v.s Renting a Home: Which Is The Better Alternative?

by: The Financial Blogger    Category: Properties
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It is a fact of life that everybody needs to have a roof over their heads. However is it a better option to own your own property or rent one?

This is a question that has been asked many times before, and I suspect the answers you will have received 10 years ago would be very different to the answers you might get today. There was a time when property was very cheap to buy, and with prices on the rise the trend was to buy for future profit! Now there has been a global crash in house prices people view the situation very differently.

What we can do is look at the situation in general, and try to come up with sensible arguments for and against both.

Long Term Plans

The first thing that should be considered when deciding whether to buy or rent should be your plans for the future. Do you intend to have a family in the near future? Are you looking to stay somewhere for a short period of time and then settle in a different part of the country? Do you travel a lot for work?

These are all questions that need answering in order to gain some insight into what is going to suit you best. For a couple looking to settle down and have a family, owning a home may be a sensible option. A couple who like to travel, change jobs regularly, and are more free spirited may be better suited to rented accommodation.

You need to be really clear as to your position in life, and future plans because if you commit to buying a property, it becomes much harder to just up sticks and move on if your plans change.

 

Financial Affairs

Although how the world economy and housing markets are performing should at least be investigated, it is your own personal finances that should determine whether you are better buying or renting.

For people who have enough money to buy then this could be a good time economically to proceed because house prices are much lower than they were a few years ago. This is due to the world credit crisis.

Many countries also have very low interest rates at present which could also benefit those looking at buying. This is all great for those who already have enough money put by to buy a home, however for those who need to borrow, lending is at an all time low in most countries meaning even people that want to buy cannot raise the funds to do so.

This of course also restricts the people looking to move up the property ladder and buy a bigger home. In other words if you want to buy, and have the money then it’s a great time to buy, but if you don’t have the money then you will find it hard to raise enough to get anywhere close to buying.

Why Would I Want to Buy?

Let’s look at some of the reasons people decide to buy their home instead of renting:

Security – When you buy you are paying for what will eventually be a home owned by your family. Nobody can kick you out, and you are able to keep that home in your family for generations.

Investments – Although property prices are low at present, there is always the possibility that they may one day increase again which could make people who buy today a nice profit somewhere down the road.  Of course this is something that you will only benefit from if you  buy a property.

No payment increase – When you rent you are always susceptible to rent increases. If your landlord decides to increase the amount of rent you pay then you will have to shell out more.

When you buy a property eventually you will pay the mortgage (if you have one) off, and that will mean no more payments towards staying in your home. When you rent a property you have to pay for however long you are there. In other words your payments will never stop.

Do as you like – In a brought property you can make any alterations to it that you want without permission. If you want to rip up the carpets and lay wooden floor then you can do it.

If you want a whole new bathroom suite then you can go straight to your local home improvement store and get one. This is a luxury that renting does not allow. No changes can be made to the property without the owner’s permission which is of course not guaranteed.

What About Renting?

Renting a property is not all bad. In fact there are some big advantages of renting that are not available with brought homes:

Repairs are not your responsibility – There’s a big storm and your roof gets damaged. It is down to the owner to pay for the roof repairs and not you. If your water tank fails and needs replacing then again it is the responsibility if the owner to fix the problem as soon as possible.

When you sign your tenancy you need to check what you are responsible for and what your landlord is responsible for so that there is no future confusion.

Not tied down – If you decide you do not like the area anymore and want to move then you can. Leaving a rented property is a much quicker and easier process than homeowners have to deal with.

Not affected by interest rates – When you are paying a home loan and there is a hike in interest rates, homeowners can find hundreds added to their monthly loan payments. If you rent you are mostly unaffected by these interest rate rises unless your landlord decides to raise your rent.

As you can see there are both positives and negatives on both sides, and much depends on your personal and financial position. Be certain of where you are in both these areas and you will be in a much better position to make an informed and accurate choice.

This article was written by Timothy Ng who is a regular personal finance writer and part of the team at Credit Card Finder, a 100% free Australian credit card comparison and application service. Visit the Credit Card Finder website for more information on buying or renting a home.

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Comments

No doubt, I think it’s one the tougher choices but in my opinion, it is much more expensive to buy a house than most owners would imagine from the start when you consider all of the costs to maintain the house, the taxes, etc.. interests are also costs that much be considered.

I have seen a lot of these types of posts on this site lately, but not much variation in the material. I understand your desire to be impartial, but it would be more useful as a resource I think if there were two separate posts, one pro and one against buying your own home. Seeing the same types of arguments posted every few days is not as useful. Great site though, keep up the good work.

by: The Financial Blogger | July 27th, 2010 (5:02 am)

Hey Brian,

I appreciate your comments. I guess the problem is that there are no white or black answers when it comes down to personal finance 😉

I agree with IntelligentSpeculator. I cannot tell you how many people I see that underestimate the cost of owning a home. They calculate the mortgage and interest costs (usually at 4% with no calculation for renewing at a higher rate down the road) and base their decision on this amount.

I was 19 when I bought my first house. Not quite sure how I even qualified but 70% of my income went to mortgage and taxes. It almost destroyed me (financially and emotionally) but it was a huge lesson.

I own 2 houses in Quebec now and before each purchase there is a HUGE analysis of what can go wrong, repairs, maintenance, (what if the tenant stops paying?!), legal and closing costs, “Welcome” tax. No more surprises for me.

Renting is never a bad option. I fully support your comments about the benefits of renting. I am sure there are a ton of people in the US that wished they’d rented over the past 5 years.

Not that the real estate crisis is indicative of possible future gains, but 100% assuming that your house value will rise forever has taught important lessons.

My advice: Buy your first home based on what you can realistically afford and since you will always need a roof over your head, ignore property values. If you can’t realistically afford a house right now, RENT.

Thanks for the post!

Indeed everything is very subjective in regards in making the choice to rent or buy. I wish we would have gotten some better advice when we made the decision to buy a couple of years ago. Some of your suggestions would have come in handy

I’ve been told that you have to account for a total monthly cost of home ownership equal to about 45% more than the mortgage payment, to include taxes, maintenance, utilities, heat, insurance, etc. So a $1000/month mortgage means you should count on almost $1500/month in actual home ownership costs. It can even be more if you’re considering a condo with higher maintenance fees.

Contrary to “popular belief, renting is not throwing your money away. You are paying for a roof over your head. Generally, your monthly costs will be much less than owning. The real brilliance of renting comes from taking that 45% difference between total rental costs and total home ownership costs and investing it. If you are disciplined enough to do this, almost every model shows that the difference between the two, when properly invested, will outstrip any gains you will make from increasing property values over the long haul.

By the way, unless you’re paying cash for your home, chances are you’re going to “throw away” almost 3 times the value of the mortage on interest payments before you pay-off your mortgage. Imagine if you invested 3 times the value of your rent in the stock market? Now who’s throwing away money?

There are other good reasons: mobility (need to find a job in another city or another part of your current city? Not to difficult if you rent, but very difficult and expensive to sell quickly if you own); a simply life-style (lots more free time — homeowners generally spend much more time maintaining the property); peace of mind (sink breaks, call the landlord; noisy nieghbours? you can complain and your landlord must act even to the point of terminating the other party’s lease — try doing that when the neighbours in the $800,000 home next to yours act up and infring upon your right to quiet enjoyment.

And there are other costs associated with owning a home… you’re going to lose 5%+ to commission when you sell; you’re going to pay a fair chunk of money annually to the municipality on taxes which for the most part, you don’t see again and don’t really benefit from (hey – as a tenant, my garbage is picked-up, my roads are ploughed and maintained, and I also use the public library.) You’re going to have to count at some point on major repairs — furnace, roof, driveway, etc.

Don’t be fooled by those who ask you to compare your rent to a simple mortgage payment. Home ownership is VERY expensive, both in terms of time and worry, and costs.

Sorry – forgot to add one thing. The way to see if you’re ready to own a home and can handle the monthly expenses is to take about 45-50% more than your current rent and plunk it into a saving account regularly — no delaying — treat it like it’s a mortgage payment and the easiest way to do so is to bank it at the same time as your pay your monthly rent as a tenant. If you can do so and are comfortable with the rest of your monthly expenses, you can probably swing owning a home. Do it religiously for 6 months. At the end of this, you’ll have a nice chunk of money that you can either put towards the home you have proved you can most likely afford, or if you were uncomfortable doing it, no harm done – you now have a nice chunk of money that you can invest, take a vacation with, or just leave there.

I go with buying of home alternative. In renting home all problems of 11 months agreement and changing house from one area to another packing the home and re opening and settle down the home it is headache.