Buying Vs. Renting: Which Is Really Better?
For years, prevailing wisdom on the topic of homeownership was either “the housing market always goes up” or “real estate is always a great investment”. After the 2008 financial crisis, however, the renting vs. buying debate has become much more complex. Now, the number of millennials buying homes is at a record low in the US. Struggling with the decision yourself or know someone who is? Let’s clear a few things up.
There are many undeniable advantages to homeownership, the most obvious of which is the financial benefit. When you buy a home, instead of paying a landlord each month, you pay into the ownership of your home. Your home equity will increase as home prices increase, assuming your home does not have an underwater mortgage (we’ll revisit underwater mortgages in a bit). There are also tax deductions on mortgage interest payments and tax breaks on a variety of home improvements that make owning your home advantageous. You may also realize opportunities to earn side incomes by renting out spare bedrooms, parking spaces, or in some circumstances, your entire property.
Beyond the financial value, there are many lifestyle perks that come with owning your home. Not all types of homes are available for rent, so it can be difficult to find the perfect home for you without buying. If customizing your living space is important to you, or if you have specific hobbies that can’t be done without making major changes to your space, home ownership can add value beyond the monetary. Owning your home also provides a level of security, with no landlord to kick you out on short notice or drastically increase rent when your lease is up for renewal.
Now, let’s get back to what an underwater mortgage is and how it might impact you. A mortgage is considered underwater when it’s market value has dropped below the value of the mortgage taken out to buy the home. This essentially means that if the home is sold while the mortgage is underwater, the owner would owe the bank the profit made on the sale and then some. All homeowners run this risk when buying property. The longer you plan to stay in a home, however, the lower your risk of getting stuck with an underwater mortgage is. Additionally, the longer you own the property, the more time you have for overall property values to rise. Most experts recommend that you plan to stay in your home at least 5 years in order to recover the costs that go into buying a home and minimize the risk of your home a home losing value in the short term.
With all of the risks of homeownership in mind, it is important to consider how stable your life and employment are prior to making the investment. Buying a home locks you into a location and requires a stable stream of income to pay the mortgage. You also need sufficient funds for unexpected repairs, property taxes, home insurance, and possible home or condo fees. The cost of buying vs. renting can also vary dramatically by geographical location. These calculators from Trulia and Bankrate will give you an idea of what is more cost effective, however, it’s crucial to do your own calculations and estimates.
Finally, when investing in a home, many people fail to consider opportunity cost. In other words, what else they do with that money. Once your money has gone towards a mortgage, it no longer actively earns interest. It’s important to take this into consideration when deciding between investing in a home or investing in something else. If you're unsure, we highly encourage you to discuss your options with a financial advisor.
Ultimately, most experts caution against viewing a home as an investment, since it can be high-risk, with property prices rising at the same rate as inflation. Instead, look beyond just the monetary considerations and at the possible benefits to your lifestyle.