Growing up many of us were told that buying a house was better than renting. Tax incentives and parental voices sent that message loud and clear. But is this still true? Consider the following factors as it relates to home ownership along with your specific situation before you decide what path to take.
The high cost of home ownership
Not only are housing prices steep in many places, the costs to buy and maintain a home are truly never ending. Right out of the gate you will have to pay closing costs which typically add up to between 1.5 percent and 4 percent of the home’s purchase price. These costs may include a home inspection fee, real estate lawyer fees, land transfer taxes and homeowner’s insurance. The annual insurance premium might also be due up front.
Then there is the ongoing financial costs of repairs and maintenance. A general rule of thumb is to expect spending 3-5% of a home’s value toward home repairs and maintenance each year. If possible, try to ensure that your ongoing housing costs do not exceed 25% of your net household income and try to keep cash in reserve for unforeseen damages to your home or appliances.
Tax relief can help
In the US, you can deduct mortgage interest, property tax and some home expenses from your income come tax time, while in Canada, any capital gain you may incur from the sale of your principal residence is exempt from tax.
Perhaps the time cost and money of home ownership are too much for you. How nice it is to be a tenant, to usually only have to pay first and last at the signing of a lease and simply call the landlord when something breaks. You don’t have to be prepared for the costs and time commitment that home ownership entails.
Rent is a known amount
When renting, you have a certainty surrounding your cost of living that you do not have when owning a home. You never know when things might break. You might have a pretty good idea, depending on the age of the home you buy, but you don’t have as much certainty as you do with a monthly rent payment. You may even be one of the lucky ones to land in a building that has rent control in place whereby landlords are restricted in their ability to raise your rent. Phew, that helps.
Are you a disciplined person?
Some people see buying a home as a forced savings opportunity, while others see the lower cost of renting as an opportunity to invest the difference. Depending on the type of saver you are, home ownership may be a great way to ensure some money is being put away for the future, especially if you don’t have the financial discipline to be a ‘smart renter’.
Are you a wanderer?
Even though we have more ability to work remotely, there is still a lot of people relocating for jobs. Given that lifetime employment is becoming increasingly rare, many of us can expect a couple of moves in order to grow our careers. Or maybe we just like to travel and live in different places. Owning a home is more of an anchor than renting. As a renter, you simply give your notice, and off you go. With a house, you might have to sell it, find renters, or leave it empty, which is not a great option. The more mobile your life, the less likely it is that buying a home would make sense for you. Given the costs to do so, a good rule of thumb is to consider buying if you expect to live there for more than 5 years.
Would you be a good landlord?
Some people buy a house and rent out part of it to help subsidize the cost of home ownership. By doing so, you might be able to reduce the number of years in your journey to being mortgage free. You have to be ok with others either living with you, or living in your house. You also have to find the right people and be certain they will be good tenants.
Buying with other people’s money
Most of the time a bank often puts up most of the money for someone to buy a house. This form of leveraging allows you to earn gains if the house appreciates over you period of ownership. However, you must be certain you don’t make yourself “house poor” and expect interest rates to stay relatively static.
Are you already in debt?
If you are carrying high-interest debt it does not make sense to borrow for a mortgage until that debt is paid off. Many people who carry credit card debt pay 19% or even more on this debt. Pay if off first, then think about buying a house.
Renting is not throwing away money
Renting is not throwing away money as you get a place to live. But, rent never ends. As a homeowner, someday the mortgage payments come to an end, and you will own your home outright. You may even sell it for a gain. As a renter, you never own. You pay rent forever.
Your Home is a Purchase, Not an Investment
Most experts agree that you shouldn’t think of your primary home as an investment. Contrary to popular belief, real estate barely outpaces inflation over time. Sure, you could time the market, flip a house, or buy a rental, but that’s different from expecting your primary home to earn you a sweet return.
The choice between buying a home or renting is truly a situation with many tangible and intangible factors. Rent prices, interest rates, frequency of moves, your self-discipline and more will go into yourultimate decision. Use some common home ownership rules of thumbs, crunch your numbers, and make the decision that works best for you and your chosen lifestyle.