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Should you buy or rent a house?

What's better, Buying or Renting?



house in the mountains in snow


This is possibly the most debated personal finance question I've seen over the past few years.  Does it make more sense to rent your home, or buy it?  Like everything in money management, the real answer is it depends on your situation, but that's not a great answer so let's dive into specific circumstances.



Before making any decision, it's important to lay out the facts both good and bad, and disregard any emotional variables that may sway you.  A few things to consider about real estate in general are, liquidity, down payments, monthly expenses, experience with construction, and more.  We can break this down for a renter and an owner.



blue house in suburbs

Renting


First let's consider the characteristics of renting a home.  Renting of course does not build any equity.  You do not have any of the benefits of homeownership, but it's also much less costly.  There is no downpayment required, no closing costs, no lending fees, etc.  In many cases you are also not responsible for all the utility payments.  It's common to have the landlord pay for water, sewage, and garbage, while this isn't guaranteed of course.  As a tenant, you also do not have to pay for property insurance, maintenance, or the mortgage.  Leases may be shorter term, or longer term depending on your situation.



It is common to pay one months security deposit, which will be paid back to you if there's no damages, and one months rent up front.  Moving forward, you're simply required to pay the rent and your respective utility bill.  If you tally this all up, in my experience this total amount is much less than purchasing a house.  The downside of course is that you don't have much to show for it at the end of the lease.




Buying


When purchasing a house, there's many factors to consider beyond how much you love the kitchen, neighborhood, and fenced in backyard.  There's several costs before you even get the keys.  This includes inspections and appraisals, lending fees, closing costs, and insurance.  You also will have to determine how much money to put down on the property.  This depends on the borrower, but is common to be between 3-10% of the purchase price.  After adding all this up, you will have to have a significant amount of savings before considering a home purchase.



After the purchase, you will be expected to pay all the utilities moving forward, property insurance, taxes, mortgage, and any maintenance or updates at the property.  Overall, this will most likely add up to a higher amount than renting, especially with current interest rates.  The benefits include paying down the loan balance over time, appreciation of the property hopefully, depreciation or interest expense write offs, and the ability to update the house to your style.




So each option clearly has some pros and cons.....which option is better??



The answer comes down to your situation, interest rates, and the economic cycle.  It is impossible to perfectly time any market cycle, but that can have a factor on the decision for real estate.  Renting makes sense for the following individual.



Renter


Someone who does not have a large savings and cash reserve to cover the closing costs and down payment.



Someone who does not have a large cash reserve to cover maintenance and unexpected repairs.



Someone who plans to move often and would only live in the house a few years before selling.



Someone who doesn't want the responsibility of maintaining a house.



Economic times when prices are inflated and interest rates are very high.



If you read these and said to yourself "Yes that's me"!  It most likely is suitable to continue renting and put off home purchases until some of these factors change.  Who would make a great homeowner?



Buyer


Someone that has a large savings, consistent income, and emergency fund to maintain the home.



A growing family or someone that intends to stay at this location for the foreseeable future.



Someone handy or who has no problem with maintaining and updating a home.



Economic conditions where a mortgage is as costly or less costly than renting a home.



Someone who is seeking an investment and will use this for cashflow purposes in the future.



If you are reading this and thing "Yes this is me"! It may make the most sense to start getting pre approved by a lender to buy a home!



While everyone's situation is different, and this is not a perfect method, it is a great little exercise to at least consider when deciding on ownership versus renting.  I personally believe real estate has amazing benefits long term, and should be a part of everyone's wealth, but it's not always a good time to buy real estate, especially if you're in a position in life that it can be more harmful than beneficial to buy.





***Investing requires risk and loss of capital, this is not a solicitation of securities and purely for educational purposes."



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