Renting vs Buying

Should you buy or rent? It depends on your circumstances, and the real estate market where you are going to live. Years ago, I sold a home for a young couple who owed almost as much as the sales price on their house. They needed to take money from savings to pay the closing costs and sales commission. You can bet that they wished they had rented for the couple years they lived there.

This gives us the principal thing to ponder when relating buying as opposed to renting: the amount of time you'll stay. Buying now and later selling a home will normally cost about 10% or even more of the worth of the home. These prices mean that if the home only went up in value 10% or so in the year or two you lived there, you won't be achieving anything (equity gain from principal pay-down is very small in the first years). You will a lot better off renting if you'll be in a town for less than a few years.

What of towns with faster rates of increase? Have you done certain serious homework? Otherwise, to assume increase will be over the rate of inflation is just gambling. The sellers in the instance above sold for the same price they bought the house two years ago - and this was in a good and rising area. You can't depend on fast increase just because it has been that way lately.

To Buy or Rent - Cost Comparison

Considering the option of buying as opposed to renting, you have to take into consideration that in several places it cost much more to buy. In Tucson, Arizona, for instance, a small home can cost $200,000. The mortgage payment, insurance, taxes and maintenance will add up to around $1,600 monthly, however you can rent the same size home for around $800.

What does this mean? Many real estate fanatics will mention that you're at least buying something for your money, and renting is tossing your money away. Obviously in this instance, more than $1,000 of your payment will be moving towards interest alone, and that's not buying anything for you.

What if you can manage to pay the $1600 monthly, but as an alternative you rent for $800 and keep the other $800 into a good safe investment that gives you 5%? In three years you'll have more than $30,000 in this account. If the home increased at 6% yearly (it has been more like 25% per year lately, but that won't continue, and supposing so is gambling and not planning), it would be value at $231,000. The costs of buying it originally and then selling it would be close to $13,800 (2% buying and 6% selling), leaving you with a profit of about 19,000 once we add your principal pay-down.

In other words, you would be at least $11,000 richer if you rented and put the difference in the bank. All market is not the same, obviously, so you have to do the calculation. Match the total costs of owning against renting, and then make good assumptions about the rate of appreciation for homes.

If you'll definitely be in one place for a long time to come, it will almost always be better to buy than to rent. In the last example, buying becomes a better bet after about four or five years. Likewise deliberate if you get a fixed rate mortgage, your payment will never change, benefit landlords won't give you on your rent payment.

To add it up, take a look at the time you'll be around, the comparison of full monthly costs, whether rents are increasing fast, and whether you have decent motive to have confidence that home prices will be increasing fast. Then look also at all the personal factors. Do you want to be responsible for the maintenance, yard work and unpredictability of ownership problems?

To buy or to rent? In the end, you have to work this one out by yourself.