When You Should and Shouldn't Rent
Two years ago, right around the time the housing market had begun to fall and prices declined, I decided that buying a home would be a good financial move. Yet two years later, I'm still a renter.
Living in an expensive city in the United States has probably affected the way I view home ownership. I've crunched the numbers many times and compared renting versus buying in my area over the past two years. Since I strongly believe in the three-times-your-income formula for buying a house, meaning you take your income and multiply it by three to find the price of home you can afford, homes in my area are out of my price range. For obvious reasons, renting is more affordable for me. However, there can be benefits to renting even in cities where the prices of homes are affordable. (See also: Renting Is Cheaper)
Renting Is Better When...
For all the hullabaloo around the benefits of buying, I beg to differ and say that renting can sometimes be beneficial, as there are some things you might not know about renting that could save you money.
You Don't Want to Worry About Maintenance
One benefit of renting is the lack of responsibility when it comes to maintenance or repair. If the roof needs replacing, you are not responsible for covering these costs. If your water heater breaks down, your landlord must repair it within 24 hours. When it comes to major repairs, or any repair that affects your level of comfort, you may be able to deduct the number of days it took your landlord to repair it off of your rent.
You Want to Pay Less for Utilities
Units that share a wall or walls are better at retaining heat, which means your gas or electric bill will be less than in a stand-alone house. Many rental buildings also cover a portion of your utilities (often the cost of water), a savings you can pocket instead.
You Want Mobility
Though you may be locked into a 6-month or 12-month lease, if an opportunity to move presented itself, it is much easier to move from a rental house or apartment than it would be to sell or rent a home you own. Mobility also means that if your finances changed, you can move to reduce your expenses, especially considering that housing consumes an average of 34% of a person's income.
One way to gauge if renting is a better financial option is to take your monthly rent and multiply it by 240 (this formula comes from Michael Bluejay's website). If you can purchase a home for that amount, then buying a house will be a better option. However, if you aren't able to purchase a house for that amount, then renting is more financially sound. Of course the key to making renting a better alternative is to invest the difference!
Renting Is a Bust When...
When I research home prices throughout the rest of the nation, I'm always shocked at how affordable homes are in other states. In some cities, monthly rent is the same as a mortgage payment. If people know they won't be moving out of the area for many years (upwards of five), buying may be the better option.
Rent Is Overinflated
During the housing boom, rent stabilized and many buildings were offering rental incentives such as one or two months free. Many people were moving out of rentals and into homes, so the rental market had to make adjustments. However, current rent prices seems to be creeping up as people are reversing their role from home owner to renter.
Housing Prices Are Decreasing
As the housing market corrects itself from the skyrocketing affect of the housing bubble, homes are much more affordable today than they were six or seven years ago. If home prices in your area are pre-2003 prices, now might be the time to buy.
Mortgage Rates Are Low
Mortgage rates have remained low over the past seven years. A combination of low mortgage rates with affordable home prices is a good indication it might be better to purchase a house than to continue renting.
I've lived within a five-mile radius for the past 32 years of my life. It would have made financial sense to purchase a home 12 years ago, when prices were still affordable. I want to kick myself for not jumping on a $110,000 starter home back in 1999. At the time my monthly rent was $925, and the mortgage on such an affordable home would have been about the same, if not less. During the housing boom that same house soared to over $500,000! Of course, I can't do anything about that decision now. I can only learn from it and realize when it makes more sense to buy.
Renting has a negative stigma associated with it that isn't justified. If you can rent for an affordable price and save more of your income towards building wealth than if you were to purchase a similar place, then renting is by all means the better of the two options. Obviously your personal finances, location, and preferences will affect your decision to own a home or to rent. Just remember to weigh the benefits and disadvantages of both.
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