Although having a home offers freedom and a sense of security, it’s important to consider the cost. These questions should help you make the right decision.
Renting affords many people the opportunity of living in areas they otherwise couldn’t afford to live in. Where you can’t buy, you can rent. This is chiefly the reason why renting is still the favorable option among many millennials. On the plus side, where you don’t plan to stay in a place for long, renting allows the opportunity to move out as long as you provide your landlord proper notice. But renting means your landlord is in control of your house. You don’t have the freedom to make renovations or use the property in some ways you deem fit.
However, if you want the flexibility and the chance of having additional money to meet other needs or put in savings, renting is a good short-term option for you. Renting is your best bet if:
1. You don’t want to be tied by the financial commitments of home ownership.
2. You don’t want the responsibilities of home ownership including regular house maintenance.
3. You want the flexibility of being able to move homes, especially if you could be faced with sudden change like job relocation.
Renting affords many short-term financial rewards but you should weigh your options carefully when making the rent vs. buy decision.
Generally, buying a home isn’t a dumb move, neither is renting a smart move. Your decision should be based on your own personal circumstances. A lot depends on where you’re at financially and other factors. The fact that home ownership is presented as a smart long term investment doesn’t mean it’s a smart investment for you. In fact, many people overestimate the return on real estate investment. Homes do not always appreciate. According to a Washington Post analysis, home prices have only grown at a compound annual rate of 0.3% over the past 100 years, whereas the S&P 500 has seen an annual return of 6.5%. That’s a big difference in terms of return on investment. Housing however offers a means to diversify your portfolio and invest in solid assets. Below are five questions you need to consider when making the rent vs. buy decision:
1. How much can I afford?
You don’t want to be house-poor? You’re house poor when all your net worth is tied to your home. A general rule of thumb says that you shouldn’t buy a home unless you can conveniently afford a 20% downpayment.
2. What’s the opportunity cost of renting vs. buying?
Sometimes, a wise move for your finances might be to rent and earn more money over time by investing the extra cash instead of putting all your eggs in a basket with buying. Check if your rent is cheaper than a mortgage.
3. What’s the state of housing in my neighborhood?
Your decision should also take where you live into consideration. Your rent price and home price will depend on the state of the housing market. They may be a lot different than the national averages.
4. What’s my net worth?
Experts say your home should only be about 20-40% of your total net worth. If you’ll be giving up your retirement savings just to become a homeowner, you might not have a healthy retirement or emergency fund saved up. This may bite you.
5. What are my long term goals?
Buying a house just to move five years later might cost you time and money. It might be cheaper to rent if you’ll likely move for a job.
The housing crisis has made people question the general assumption that buying a home equals financial stability. Once you analyze your numbers, you’ll have a better idea whether renting or buying is the right move for you.