The Housing Debate: To Buy or to Rent
At one point in time, there was no debate as to whether you should buy a home. This is supported by the fact that our parents always encouraged us to purchase a home rather than rent.
These days, the world and people’s lifestyles are changing. Now it’s not so clear-cutthat buying a house is always better. We’re not saying it isn’t better, but in some cases renting is preferred. It really just depends on you and your particular situation.
What should you consider when deciding whether to buy or rent a home?
There are many factors at play when deciding whether you should rent or buy a house:
The individual’s lifestyle and future plans:
Flexibility and Mobility: One major benefit of renting is that you have more flexibility in terms of where you decide to live. Not to say that you can’t sell your house and move elsewhere, it’s just a more expensive process to do so. Renting allows for more mobility if you feel that is important to you.
Homeownership:There is also the feeling of comfort in knowing that you are living in your own home. You own the property and it’s yours to inhabit and change. Not to mention, there are other benefits of owning a house from a financial aspect - we will discuss this more shortly.
Current levels of housing prices:
You will want to compare current pricesto the level of expected future housing prices. Of course, if the current levels are lower than where you think they will go, then this could be the time to buy – so long as you have the means to do so.
Future levels of housing prices:
You will want to compare the expected future housing prices to current levels. If there’s a possibility that prices may go down compared to current levels, then you may want to wait. On the other hand, if you think they will rise above current prices, then now could be a better time to buy.
Which option is better from a financial standpoint?
We’ve already mentioned the mobility benefits of renting versus the psychological benefits of home ownership. From a financial aspect, the difference boils down to whether you are saving money by renting and how you are employing the money you save as a result of renting. To find this amount, you will want to compare the cost of owning a home to the cost of renting. Choose a specific time frame to use in your calculations. This should represent how long you plan to live in the potential home.
The cost of owning a home consists of:
Mortgage payments (principal and interest)
Maintenance and repairs
All other expenses involved in homeownership
Costs of later selling a home (unless you plan to live there indefinitely)
Once you have an estimate of the total cost of living in the home for the number of years you anticipate, you will need to determine any capital gains. To do so, you will need to provide some estimate as to the difference in the amount you originally bought the house for and what you could sell it for. If you think you will be earning a profit on the sale of your home, then subtract this amount from your total cost. Otherwise, add this additional loss to your total cost.
The cost of renting includes:
Monthly rental cost
Electricity, utilities and Internet, if not included
You will want to multiply this amount by your specified time frame to arrive at a grand total. This side of the calculation is very straightforward.
Now that I have two totals, what’s the difference?
Use these two amounts and determine the difference between them. Which one is the better financial choice at this point? Is homeownership the better option from a financial standpoint or is renting?
If renting is the cheaper option, take the amount you would save and determine what you could earn by investing this money in an asset of your choice. Take the earned investment interest and subtractit from your cost of renting. Compare these two totals between renting and homeownership again to see which one is worthwhile from a financial perspective.
There you have it, if you are deciding strictly on a financial basis what the best housing option is for you then this calculation will provide your answer. Otherwise, you should seriously consider your future goals and lifestyle to pick the best suited option for you.
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