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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I wanted to steer our previous real estate discussion in a different direction today. We talked about rental properties, negatives of real estate, positives of real estate investing, and various other sub-topics. I just missed one CRUCIAL STEP. I completely neglected the fact that getting a mortgage these days isn’t that simple!

For today let’s look at what needs to be done so that you even get approved for the actual mortgage:

Excellent credit score.

Without a high credit score (in the 700s) you’re an extremely risky loaner in the eyes of the lender. Why would anyone loan you hundreds of thousands of dollars if they’re not sure that you’ll pay it back? Great point. This is why you need to ensure that your credit score is up to par before you even attempt to go in for a mortgage application. Years of late credit card payments may come back to bite you in the know what here.

Hefty down-payment.

The days of leveraging a real estate property with 5% or 10% are pretty much long gone. Unless the underwriter working at the bank is your buddy John from third grade, chances are that you’re going to have to put down a serious down-payment to get approved for a mortgage these days. What’s a hefty down-payment? Well I don’t work for a bank, but it’s fair to assume that at least 20% is recommended. Anything less than that and you’re going to have a difficult time with your mortgage approval application.

Savings/assets.

If the home property is going to eat up 100% of your savings, how will you survive? How will you cover your mortgage payments if you lose your job? It doesn’t matter if you need the mortgage to pay for a rental property or your primary residence, you need to show the lender that you’ll have sufficient savings “just-in-case.” If not, then you simple become another risky client. Being in possession of additional savings/assets shows the lender that you have money to cover any surprise expenses that may come your way.

Steady work.

Do you have a steady source of income? When being loaned a large sum of money, you need to prove that you’ll have enough of an income to consistently make your payments. If you’re an entrepreneur or someone that has a difficult time proving their financial situation, the lender may not be too eager to loan you money. It’s not that they don’t believe in your potential to earn lots of money down the road. They simply want a guarantee of this.

Paper work.

Saying that you make X or do X for money is irrelevant. You need to back everything up with extensive paperwork. This never happened to me thankfully. Unfortunately, many readers have informed me of stories where their place of employment was called 3-4 times just for verification. Apparently, there were no errors with the actual application form, but the lender wanted to double check a few pieces of documentation. Are you prepared to deal with this?

Have any of you gone through the mortgage approval process recently? If so, how did it go for you?

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We’ve gone over the negatives of real estate investments, common real estate misconceptions, and the positives of real estate. What’s next? Now we can assume that you’ve decided that purchasing a piece of real estate is the ideal option for you at this very time in your life. What do you do next? In my opinion I feel that the next step is to look at some of the important factors when it comes to purchasing real estate.

Now that you’ve decided to invest in real estate (I’ll be referring to your primary residence in this post, not investment property) you need to look into a few important factors:

Location.

Real estate is 100% all about location. Let’s be honest, the cost of my downtown condo could probably get me a mansion out in the northern part of Ontario– but why would I live there? I’m not trying to raise a family. Real estate prices are directly related to the location. The question that you need to address is: where do I want to live?

Proximity to work.

If you commute to work you’ll likely want to find a place that’s relatively close (unlike some crazy people that travel 1.2 hours to work, wink wink) to your destination of work. One of the most important factors is to consider how long it will take you to get to your job from your new place.

Are you willing to travel a little longer for a more spacious home? Do you prefer to live in a more compact unit that is closer to work?

Neighbourhood– what are you looking for?

What’s in the neighborhood? Do you want to be located near a elementary school for your young children? Or do you want to live closer to a high school/college for your older kids?

Another aspect of the neighbourhood that you need to consider is the demographics. You certainly wouldn’t want to raise a family in a downtown condo or in a more dangerous side of town. Would you like to live in a community with a similar culture to yours or would you prefer a more diverse community?

How much work are you willing to put in?

I have friends that have picked up properties for low prices in hopes of making some serious upgrades. Some people enjoy fixing up their property. Others would like to purchase a property that is relatively low maintenance and already has major upgrades completed. Do you want the challenge of upgrading your own home or do you want the work to already be completed?

Property taxes.

You could save up some decent money with your partner to make a down payment on an expensive piece of real estate. However, will you be able to pay the property taxes? Property taxes can be a silent killer that eats away at your income before you even know it. This is why it’s important to always consider the property taxes in the specific area that you plan on moving to.

How steady is your income?

Yes I know that this isn’t directly related to your potential piece of real estate. It is very important when it comes to determining how you’ll pay your new found mortgage payments. I don’t want to be a downer, but a high salary today doesn’t necessarily mean that you’ll be earning a high salary down the road. You need to make a realistic assessment of the stability of your income before you decide to take on a mortgage.

Where do you guys stand as it relates to some of the questions thrown out in this post?

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I hope you guys don’t think that I’m against real estate. In my last post here, I wrote about some of the common real estate misconceptions. It’s not that I’m against real estate. I simply wanted to stress all of the factors that go into making this ultra important decision. Too often do 20-somethings take this decision extremely lightly. I’ll never tell you what to do, but I do want you guys to make educated decisions.

The irony of this topic is that I just moved into a new condo this summer. I personally feel that it was a great decision, considering all of the factors involved (to be discussed soon). Today I wanted to write about some of the positives when it comes to real estate.

Forced savings.

Many of us young people simply can’t save money. We just can’t do it. Having a mortgage to pay forces us to technically save money every month. For many people a home is their main investment/savings vehicle. The money that is paid towards a mortgage could be frivolously spent on random purchases. Instead this money is put towards the real estate property. I’m not say that this is good or bad, but it is what it is.

Of course the obvious caveat exists. Along with being forced to save money, you’ll also lose lots to money to the expenses that go along with real estate (interest, of course!). Please do keep this in mind.

Appreciation potential.

Your primary residence may not be the worlds greatest investment. However, there’s always the potential for an appreciation in value. The appreciation in value isn’t always the greatest and it won’t always offset the fees involved with selling a home. However, depending on the area it’s not rare for home owners to experience great appreciation gains.

It’s also imperative to note that, your property can appreciate due to two reasons:

• Internal factors. This involves all of the upgrades/work you do on your property. Whether you choose to finish the basement, upgrade your kitchen, or install a sprinkler system, these modifications have the potential to create a profit that will offset the expenses greatly.
• External factors. This appreciation is unrelated to the work that you do on your property. This involves the value of the whole area increasing. Depending on your risk tolerance and patience, you can purchase a piece of property in an up and coming area, in hopes of great appreciation in the future.

Instills responsibility.

This may seem superfluous at first, but it’s actually completely relevant. In my experiences, home ownership is a harsh reality slap across the face that some young professionals need. Our generation is generally fairly spoiled. We’ve all heard that 27 is the new 21. Often times we need to get out of our comfort zones. Whether it be through moving out or working abroad for a year, every situation varies on a case by case basis. Moving out can be the first slap of reality that we need to become truly responsible adults.

What are some of the positives of real estate/home ownership that I may have missed?

Just please remember to always conduct your own research when it comes to real estate. There’s thousands of dollars at risk here. This is also the most important decision that you’ll make in your life (aside from marriage & education), so please don’t take it lightly.

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I could be a pompous punk and brag about my real estate investment I made in college—but I won’t. Why not? Because it wasn’t the greatest decision of my financial career. I’m proud of my decision to purchase a condo at a young age, but I wish I did just a little (okay, maybe lots!) more research. I hope that all of you aspiring real estate investors peruse this post before you transfer your hard earned savings to a mortgage down payment.

Many more costs than you will originally think of.

We all know that you have to put aside money for your mortgage down payment. Unfortunately for all of us, this is just the beginning of the plethora of costs! These are a few additional costs you need to consider with a real estate investment:

1. I.            Lawyer fees- You’re looking at least another $1,000.
2. II.            Closing costs- You don’t even want to know what’s included in this.
3. III.            Land transfer tax- This depends on where you live, but yes it’s another potential cost.
4. IV.            Maintenance fees- You will need to pay monthly maintenance fees for your condo investment. God bless you if the condo has a pool and a gym.
5. V.            Property tax- You may own the property, but the government will still charge you taxes.

Not the greatest investment.

Real estate isn’t really the greatest investment. Let me rephrase, real estate can a highly lucrative investment—but not always! There are many investment options out there. Let me share some other investment ideas with you guys that could be more beneficial than real estate:

1. Savings account. You can put your savings into a high interest savings account. You can sleep comfortably at night time knowing that your money is slowly growing. Not the sexiest investment option, but definitely the safest.
2. Startup Business. You can invest the money into your new side business. The thousands of dollars could be used to purchase equipment, register your business, market your services, or even to help you survive during the lean times. This could potentially be riskier than a real estate investment. Please do all of the necessary research before you decide to start a business.
3. Education. The money could be used to take evening courses at your local college. You can improve your current skills or possibly learn a whole new skill set. This investment isn’t the sexiest either, but you can’t go wrong investing in yourself.

Plenty of risk involved.

You really never know what’s going to happen. One bad shooting, one negative consumer housing report, or even a shift in social trends, and the area your property is located in decreases in value. Oh did I mention the potential of a housing bubble burst?

I took the risk of buying a condo that is just outside of downtown Toronto in an area that’s currently not in the greatest condition. I can live with this risk because I’m a young, single dude. Not everyone can handle this type of risk. Where does your risk tolerance stand? Can you handle losing some money upfront? Can you wait before you “cash out?”

I hope I didn’t scare anyone away from a potential real estate investment. Do any of you guys have stories you would like to share on the topic?

Author MD

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