When you need a place to live, especially when relocating to a new city, one of the first questions that comes to mind is, “Should I rent or buy a home?” Considering that more than two-thirds of American families are homeowners at the time of this writing, it would seem most people believe buying is the best option. That being said, sometimes fluctuations in the real estate market and personal circumstances can make the decision to rent vs. buy less cut-and-dried. For example, if you have a limited amount of savings and a less-than-perfect credit score, you might lean toward renting because the barrier to entry is lower. Conversely, if the economy is on the decline and home values are currently dropping, you might be concerned about buying a home only to go “underwater” on your mortgage.
Whatever your current circumstances, the decision to rent or buy is not one to be taken lightly. Taking a closer look at the pros and cons of buying vs. renting will help you make an informed decision about which option is the best for you at this time.
Pros of Buying a Home
Buying a home comes with some distinct advantages over renting, many of them financial in nature. So let’s start here.
Building Equity as Home Values Increase
While the real estate market has its ups and downs, long-term trends show that real estate consistently increases in value over time. In fact, many financial experts agree that real estate is one of the smartest and safest long-term investments you can make. Your home equity increases over time in two ways: (a) through every dollar you pay toward the principal on your mortgage loan and (b) through the gradually increased market value of your home over time. Once you achieve 20 percent or more equity ownership in your home, you can use that equity as buying power to refinance your loan, to invest in home improvement or to roll that equity into a down payment on a bigger home. The point is that homeownership is a method of building wealth — giving you more financial freedom over time.
Tax Deductions
Homebuyers might also enjoy certain tax benefits that renters don’t qualify for. One of the most common tax advantages is that you can deduct the cost of your mortgage interest and property taxes from your federal income taxes (a benefit called the “mortgage loan interest deduction”). In some states, your home may also qualify as a homestead, which could reduce the amount of property taxes you pay.
Freedom to Improve, Renovate and Decorate
When you own your home, you don’t have to ask anyone whether it’s okay to repaint a room, change the carpet, update appliances or perform other home improvements. You own it, so the creative decisions are yours. Exterior improvements may be subject to city codes or homeowner’s association guidelines, but you are free to make improvements at will beyond that (improvements can also add equity to your home).
Possible Additional Income Streams
As a homeowner, you’re also an investor. At some point, you may choose to move out and keep the home as a rental property. You may also opt to rent out a room or basement or set up your home as a short-term rental on a platform like Airbnb. Since you own the property, you are free to exploit it as you wish for additional income.
Cons of Buying a Home
Home buying comes with a few possible disadvantages, as well. Let’s explore these in more detail.
Higher Costs Upfront
In most cases, buying a home requires a pretty significant outlay of cash upfront that most renters don’t have to worry about. These include any/all of the following:
- Down Payment — This can be up to 20 percent of the purchase price for conventional mortgage loans or about 3.5-5.5 percent for an FHA loan.
- Property Taxes — You may have to pay some property tax in advance, or you may have to agree to pay the current owner’s taxes before taking ownership. Future property taxes will be worked into your monthly payment.
- Advance Homeowner’s Insurance — You may have to pay your first-year homeowner insurance premiums in advance. Future insurance premiums will be worked into your monthly payment.
- Closing Costs — A variety of line-item costs that can include the cost of home appraisal, home inspection, title search, title insurance, loan origination fees, etc. Closing costs generally run between 2-4 percent of the cost of the home.
Ongoing Maintenance/Repair Costs
When you are a renter, your landlord is responsible for fixing something if it breaks. When you own, you have to pay those costs. Maintenance and repair costs can crop up suddenly and without warning. The older the home, the more likely there will be something in need of repairs at any given time.
HOA Concerns
If your home is in a neighborhood governed by a homeowner’s association, you will be responsible for keeping up with any dues, which may run into the hundreds or thousands of dollars per year. You’ll also have to abide by any HOA covenant agreements, and you will pay the fines if you violate those agreements. When you are a renter, your landlord deals with those headaches.
Investment Risk
While real estate tends to be a safe investment overall, there are occasional times when the housing market shrinks or even collapses (for example, the mortgage crisis of 2007 and the following Great Recession). In extreme cases, this can leave you owing more money on your mortgage than your home is worth, at least temporarily. If you can’t “stick it out” and have to sell during a market low, you could lose money on the home.
Pros of Renting
Having looked at the pros and cons of buying a home, let’s do the same for renting a home, starting with the advantages.
Low Barrier to Entry
It is far easier to enter into a rental agreement than to buy a home. Most landlords require a refundable security deposit, and, in some cases, you may also pay broker’s fees, but these are a fraction of the cost of a down payment and closing costs. While some landlords require a credit check, the credit requirements for renting are far more lenient than they are for qualifying for a mortgage loan.
No Responsibility for Repairs and Maintenance Costs
When you live in a rental home, your landlord is responsible for fixing something if it breaks, making it much easier to live on a tighter budget.
Easier to Move
When you buy a home, you’re generally making a long-term commitment. If you have to move, you have to go through the trouble of selling it if you want to get out from under the mortgage. As a renter, you’re only obligated to live in the home for the duration of your lease — and even then, there are usually agreed-upon terms for breaking the lease. Relocation is much easier as a renter.
Other Advantages
Many lease agreements carry additional perks for renters. Some landlords cover one or more of the utility costs as well as the costs of lawn maintenance. Certain rental units come furnished, and most include at least some appliances (e.g., refrigerator, dishwasher).
Cons of Renting
Renting comes with some very common drawbacks, as well. Let’s look at a few:
Less Housing Security
One of the biggest issues renters face is the prospect of having the home sold out from under them at the end of a lease — which is the owner’s prerogative at any time. While most cities and states have laws that afford some protection to renters against arbitrary evictions, almost nowhere are you guaranteed to live in a rental home indefinitely. When you own your home, no one can tell you when to vacate as long as you make your payments.
Vulnerable to Market Fluctuations and Rent Increases
Rental rates are generally based on current real estate market values, and the landlord usually has the ability to raise your monthly rent every time your lease renews. In some cases, a rent increase can force you to seek other housing. Homeowners may sometimes face increases in property taxes and insurance premiums, but their payment never increases if they have a fixed-rate mortgage.
You Are Building Someone Else’s Equity
One of the biggest disadvantages of renting, from a financial standpoint, is that your rent payment never builds your own wealth — it builds someone else’s wealth. You will never see that money again. When you own your own home, you invest in your own wealth with each monthly mortgage payment.
Bottom Line: Should You Rent or Should You Buy?
From a purely long-term financial standpoint, 67 percent of homeowners in America are right. In general, if you are able to do so, it is almost always better to buy a home than to rent. However, there are certainly times when homeownership’s advantages are minimized due to market fluctuations, etc. Therefore, in our minds, the real question is not whether to buy but when to buy. Generally speaking, if you plan to live somewhere for less than a year, you probably won’t build enough equity to justify buying a home during that time — so renting may be a better option. Likewise, if interest rates are high, a housing bubble has raised home prices to unsustainable levels or you live in one of those rare times when mortgage payments cost more than rent payments, then it might be wise to wait until the housing market is in a better place before buying.
If you are ready to take a serious look at homeownership in the Atlanta area, Atlanta Fine Homes Sotheby’s International Realty can help you find the perfect home for your needs and budget. Contact us today to get started!