Determining Which Choice is the Right One for You
Despite what a lot of Real Estate Agents may tell you, buying a home isn't the right decision for everyone. And since a home will probably be the most expensive thing you will ever buy, it should also be a decision you don't take lightly. Consider these several things before you start to look at buying a home:
Mobility: One of the first things to ask yourself is, "how mobile do I need to be?" Is there a chance your job, family, or education could relocate you in the next few years? Are you the kind of person who would pack your bags and move to another part of the country on a moments notice just to get a change of scenery? If so, renting gives you increased flexibility to move when you want. Buying a home, on the other hand, makes it more difficult to relocate because you have to deal with selling your home as well as the logistics of moving. From a financial standpoint, it also costs money to buy and sell a house. There are real estate commissions, title fees, loan fees, reports and inspections. A home must appreciate approximately 5-15% just to recoup these costs. If you plan on moving within a three-year period it may make more financial sense to rent than to own.
Income: How stable is your job? Do you forsee a sizable change in income (for better or worse) in the upcoming future? Is there a chance you may need to move for a less (or more) expensive place to live? Owning a home is a commitment- a financial commitment. If you are renting, and your job changes, you can always end your lease and find a cheaper (or more expensive) place to rent. However when you own a home you are responsible to make those home payments until the home actually sells.
Commitment: Renting shifts property management and maintenance responsibilities to a landlord. The maintenance and upkeep costs are generally included in the rent. With some exceptions, like say a condo complex, you the home owner are responsible for the upkeep on your home. That may mean mowing the lawn, fixing a broken faucet, or replacing cracked windows yourself.
At the same time, if you are new to a place, and you are not certain that you are going to stay, renting gives you an option to "test out" a city or neighborhood before making any commitments beyond a simple lease agreement.
So why Buy?
The points above are all legitimate reasons to rent a home over buying one. In fact, a need or desire to be mobile is generally the top reason people rent homes instead of buying them. However there is another reason people rent homes-- they don't understand the benefits of home ownership.
If you are currently renting, you need to know about the possible advantages that you can reap from home ownership, and if they might apply to your current situation.
Renting vs. Buying: Doing the Math
Compare the cost of owning and renting the same home. This is simple enough to do. Just take the monthly mortgage and other housing costs and compare it with the cost of renting that same property. If you don't know how or where to get these numbers, fill out the form below, and we will give you assistance.
Next, determine the tax savings you would get from home ownership by taking the cost of the mortgage payment plus property taxes and multiplying that by your tax rate. This will give you a fairly good idea of your tax savings each month. Then subtract those savings from your monthly housing costs if you were buying and compare that with the rental rate. Again, if you don't know these numbers, fill out the form below and we can help you understand these numbers.
Now, if the numbers are very close in monthly expense it is usually a good value to buy. If the additional expense is more then 20 to 30% you should be cautious. Be particularly cautious if you plan on moving again in the next 3 to 5 years. It should ultimately cost you less to own a home then to rent.
In addition to the current cost of renting vs. buying, you must also take into consideration the future cost. As a renter you are exposed to future rent increases. In general, it is reasonable to expect an annual increase of 4% per year to your rent. As a home owner, if you are locked into a fixed rate home loan, those costs don't change over time.
Advantages of Owning
There are many advantages to home ownership. Unlike renting, where the money you spend monthly on rent does little for you besides give you a place to live, home ownership helps you build savings every month as you slowly build up the ownership in your home by paying off the loan you may have taken out to buy it. This ownership is your home is called equity. More important, long-term, the value of real estate usually increases over the time- which also builds equity.
Let me use a real life client of mine, whom we'll call Mike, as an example. In 1999, Mike was paying $1,100/month to rent a town home in Chesterfield. Mike wanted to continue paying around $1,100 per month, so he purchased a home in Ballwin for $130,000 with a bank loan of $130,000. By 2004, Mike 's loan was approximately $124,000. Assuming the home was still only worth $130,000, Mike would have built up $6,000 in savings (equity in the home) over those five years that he wouldn't have had by renting. However, in this case, Mike decided to move in 2004. When he sold his home, Mike received $174,000 for it- because the property had increased in value over those years. As a result, Mike's equity in his home, over five years, was $50,000. Had Mike continued renting, when he moved in 2004 he wouldn't have gotten anything back.
Even without this expected increase in value, paying on a mortgage over 15-30 years can guarantee that you will eventually own your home free and clear. What's more important to understand, is that the equity you are building in your home can be borrowed against at some future time for college expenses, vacations, remodeling the home or almost anything else you might need the money for. You don't have to sell your home, like Mike did, to gain access to that equity.
Of course all benefits to home ownership aren't financially related. When you own your own home you are not subjected to the intrusion of a landlord. Generally no one can tell you what you can and can not do with the property (within legal limits of course). If something is broken you are not at the whim of someone else as to when, how, or why it should be fixed. If you want to paint your walls red, you don't have to get permission from a landlord to do so. If you want to get a cat or dog, again, there is no landlord to tell you no. And a landlord can decide to sell the property and put you out into the street. As a homeowner, you have the security of knowing that you have a place to live, as long as you continue to meet your mortgage and tax obligations.
Shoud You Rent or Buy?
There is no right or wrong answer to this question. Everybody has different needs- and what is right for one person is a disaster for another. However if you are curious if buying a home might be right for you, the consultants at The St. Louis Agent Team offer a FREE consulting service to help you make this decision for yourself. Simply call (314) 598-4040 and speak to a consultant about your options. Finally, don’t make the decision based on someone else’s expectations (parents, family, friends, a real estate agent, etc). This is a decision that only you can make, and only after careful consideration.