For many of us in the United States owning a home is considered “The American Dream”. After the great recession and the housing meltdown some have begun to question the wisdom of that assumption. So, the question becomes, is it better to buy or rent? As with many great questions in life the answer is, it depends.
One of the most important items to consider before making a decision to rent or buy is how long one intends to stay in the area.
Generally speaking, if you intend to stay in the home for a longer period of time, the benefits of owning a home can start to swing the pendulum toward better to buy. In addition to building equity, home owners get the benefits of tax deductions, no capital gains tax (up to certain limits) and the freedom to make modifications if they see fit. Further, a home could be a great hedge against inflation. These advantages can be significant monetarily.
On the other side of the coin if one is buying “short term” it could be tough to recoup their investment. This is due to the buyer paying a myriad of closing cost and anywhere from five to seven percent of the value of the home when it comes time to sell. This is compounded by the fact that in the first few years of ownership most of the mortgage payment is applied to interest and producing very little equity for the owner. To boot, owning a home naturally comes with maintenance cost. All these factors can make it tough for the short-term home owner to turn a decent profit. What about renting the home out if you need to move shortly after you buy? That can be a great option but often times rental rates are less than the cost to own. Additionally, a property management company can charge as much as 10%. These factors could combine to leave you in a state of negative cash flow until rents catch up with your mortgage.
That is why renting in the short term can offer some advantages. Additionally, renting does bring with it some other significant benefits. Often the cost to rent is a fraction of the cost to own. This fact alone could allow a family that couldn’t afford to own in a particular area gain access to a community, or perhaps a great school district, that otherwise would be out of reach. And, of course, maintenance is generally on the landlord. Not only does the renter usually not pay for maintenance but if something goes wrong they just pick up the phone and transfer that problem to the owner. The renter can also look for leases that provide the flexibility they are looking for. This enables the renter to be relatively nimble and move on when ready.
In the end the decision to rent or own will not only be based on your timeline but also on your values and priorities. There are key advantages and disadvantages to both strategies that should be weighed carefully when asking yourself, “is it better to buy or rent?”
Jeff Rotherham is a CERTIFIED FINANCIAL PLANNER™ with an extensive background in personal finance. He is transitioning out of his full time career with the Navy into his new role as Director of Financial Planning with The Gensler Group. Jeff is a long time Coronado local and family man. He is passionate about helping people with their financial planning and excited about his future with The Gensler Group.
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