There is no right answer to the renting vs buying question, which one is better or worse depends on your circumstances. These include your job mobility, the economy of your town or state, and your finances.
Pros Of Buying Real Estate
Owning a piece of real estate gives your family a sense of permanency that is often not felt when renting. This allows you to put down roots within your community and gives you a sense of connection. Buying real estate also has the following pros:
Creating Equity
Monthly mortgage repayments to your lender are like money placed in a savings account. That money eventually comes back in the form of equity as your home appreciates during the years of your ownership.
Mortgage Repayment Remains Stable
Financing your home with a fixed-rate mortgage allows you to know the exact amount of your monthly repayment. This predictability cannot be guaranteed when you pay a monthly rental. Over 30 years, you know that for 360 months your mortgage repayment is fixed. Also, an increased income during that period makes your repayment even more affordable within your overall budget.
Tax Breaks
Even though some of the tax breaks, like interest and property tax deductions, were removed by the Trump Administration, you still have one tax break left. You do not pay capital gains tax on the first $250,000 profit on the sale of your home if you are single. Married couples have a limit of $500,000.
You Have More Control
You can make any changes to your home without having to consult the owner of the property. This includes your choice of pets, leisure activities, and the color of your walls. You also don’t have to worry about your landlord refusing you a lease renewal.
Cons Of Buying Real Estate
In exchange for fixed monthly repayments, you take on the following responsibilities.
Down Payment
To qualify for a home loan, you need the money for a down payment of between 3% and 20%. This money is like any other financial investment, it probably will increase in value, but it could also decrease.
Maintenance Responsibilities
You are solely responsible to fix any maintenance issues. Also, renovations do not offer a significant increase in the value of your home.
Possible Value Decreases
The purchase of your home may follow a financial boom or decline in the country, state, or town you bought in. This will affect its value, and a downward trend will affect your equity.
Less Flexibility
If you decide to move, you must wait to sell your home before you can get your equity back. This can take more time than you want because it depends on real estate market mobility at the time.
Property Taxes
Property taxes depend on the municipality you live in and are usually based on the assessed value of your home. Your property must be clear of liens.
Homeowner Association Fees
If your home forms part of the homeowners or condo association, you will be responsible for your share of the monthly fees. Capital improvements and inflation lead to an increase in your payments.
Pros Of Renting Real Estate
You may prefer renting an apartment if you are one of those people who prefer to be flexible. This may be because you need to be mobile for your job or prefer to be able to change areas or home size whenever you want. Other pros of renting include:
- You don’t need to worry that your asset is going to depreciate in a housing crash, leaving you with a bigger mortgage loan than your property is worth.
- Repairs are your landlord’s concern.
- Your landlord may indirectly be passing on some of the property taxes into your rent, but they are none of your concern. If you feel the rent is too much, you can always move elsewhere.
- You may prefer investing your equity into a more liquid investment with a higher potential for returns.
Cons Of Renting Real Estate
There are several cons of renting real estate besides not being able to modify the property as you want. These include:
- Your annual budget is not easy to predict because your rent increases with time.
- You cannot build any equity because the money is going to your landlord.
- It is highly unlikely you will build a nest egg from the money you are saving from not paying property taxes or maintenance.
- You are not benefitting from any tax savings property owners have.
Even though some properties sometimes feel ridiculously overpriced, home prices across most of the U.S. have continued to appreciate over the last two decades. Learning how to invest in real estate requires you to keep a close watch on the long-term economic development of the area you are interested in investing in.