Buying or Renting?

Questions to Ask Yourself

When you first started thinking about buying your own home—not living in someone else’s and paying rent each month—you could have been motivated by several things. Someone doesn’t just wake up one morning and think, “I’m going to buy a house today” but rather, the concept tends to grow over time.

Whatever the motivation, you’re not the first. In fact, every homeowner today was at one point a first-time buyer, and they all had varying reasons why they decided to buy and stop renting. But don’t take the issue lightly. You need to do some thoughtful research beforehand to find out if buying is right for you at the proper time.

When you buy a home, it’s somewhat a permanent transaction. Real estate isn’t the most liquid of assets. For instance, if you buy something at the mall and later get a dose of buyer’s remorse, all you typically need to do is return the item for a refund. Changing your mind is okay. Even if you bought a car and after a year decided you made the wrong decision, you can always sell the car. You probably won’t get back what you paid for it but at least you got out from under it and bought something else.

With real estate, it’s not that simple. If you make the wrong choice or decide that owning isn’t for you, the only options are to sell the property or rent it out. Selling costs can get a bit pricey and if you sell too soon after you’ve bought, it’s possible you’ll have to come to the closing table with some cash.

Buying real estate requires some careful consideration. But after conducting some research and answering important questions, you can determine if buying or renting is better for you right now. Here are the questions you need to ask and find answers to.

How Is the Rent in the Area Where You Want to Live?

When mortgage rates are at relative lows, this keeps the monthly mortgage payments low as well. What you want to do is compare current market rents for the type of property you want to own in the area where you want to live.

This is easily done simply by doing an online search. You can enter the type of property you’re considering in the zip code you’d like to be, and check out the rent for properties in that location. However, your better bet is to contact a real estate agent and have the agent do a search for you, and have the agent provide you with a range of options. Real estate agents do this full time and it doesn’t cost you anything. The agent is compensated by the owner of the property who pays the agent a finder’s fee when the agent brings in a qualified tenant.

If the rents are higher than what you would pay with a mortgage, you’re halfway there, but not all the way. Lenders evaluate a mortgage loan application not only based on the principal and interest payment but also the property taxes and insurance on the property. For example, if you plan on borrowing $250,000 and current rates are 4.50% on a 30-year loan, then the principal and interest payment are $1,266, while annual property taxes are $3,000 per year, and homeowners’ insurance is $2,000. The monthly amount of taxes is then $250 per month and insurance is $167, for a total monthly payment of $1,683. If market rent for a similar property is higher than this amount, buying might make sense.

If on the other hand, rents are about the same or much lower, at least on a cash flow basis, it might make better sense to stand pat.

Are You Really Ready?

This goes back to a previous question about readiness. Are you emotionally prepared to take the plunge? Your real estate agent can help find properties for you whether to rent or buy, and a mortgage company can help with monthly payments, loan types, and closing costs but beyond these factors, are you ready?

For those just starting out with their careers, renting is probably the better choice. Especially, if their new job is located in another city. Renting is another word for flexibility. When you rent, your lease agreement is typically signed for a 12-month period. Remember those noisy neighbors? As the end of your lease draws closer, you can start looking for another place to live.

What about your job? While you were excited about your job offer and couldn’t wait to get to work, after a few months of being in the office, you’re regretting accepting the position. Your boss is a jerk, and the office is just too full of politics. When you start looking for another job, you might be limited to explore new opportunities in relation to where you live. Renting allows you to look beyond your current zip code.

One more thing, when you rent, you have a landlord and a landlord also means having a handyman at your disposal. Let’s say you wake up one morning and the kitchen faucet won’t turn off all the way and has developed a sizable leak. It’s noisy and you can’t ignore the drip, drip, drip all day. All you do is call your landlord or the property manager, and they will come to fix the faucet. If you own the home, you also own the faucet.

There is no landlord, and you’re the property manager. So, you either head to the hardware store or call a plumber. The plumber is $150 per hour.

And this is a small repair. What if the hot water heater goes out? What if your dishwasher, oven, or refrigerator goes on the blink? Beyond the mortgage payment, taxes, and insurance, you’ll be on the hook for maintenance and repairs as well

What’s Your Timeline?

Do you anticipate buying and staying put for a while? If you’re ready to settle in a particular neighborhood and the home meets your criteria, then you’re probably going to stay awhile. If you don’t see yourself moving in the near future or a there’s not a possibility of a job transfer, then buying might be the better choice.

If you’re not sure, you may want to wait. For some, renting in an area they’d like to live in before buying in that neighborhood is a great strategy. Why? Because you can get a true understanding of all the implications moving into that particular zip code. How is the traffic to and from work each day? Speaking of traffic, do cars use your neighborhood as a shortcut? What about shopping? Is there a grocery store nearby? If you live in an area first before deciding to buy, it’s very likely you’ll stay there for a while.

If you buy and sell relatively soon afterwards, it’s possible you won’t get enough from the sale to cover the associated expenses that selling a home incurs. In this instance, there is no net advantage to owning vs. renting. If you see yourself staying in a property for five years or longer, buying is likely your better choice.

Finally, don’t stress out. Don’t think too much that you can’t come to any decision. You certainly want to make the right choice for you but if you’re experiencing “paralysis by analysis”, then you’re putting too much thought into it. You want to make the best decision you can but keep the stress levels low. Your best decision is made with a clear head and not because someone is telling you that it’s time to buy a house before it’s too late, or some such “advice.”