The Pros and Cons of Renting Versus Buying a Home
It’s one of the great, simple debates in real estate. Nothing like the state of the industry, what’s next for MLS, or emerging business models due to the internet. It’s just:
What are the pros and cons of renting versus buying a home?
Is it better to rent?
Is it better to buy?
The Brent Germany Team has answered these questions many times over the years. I always respond that there are many factors that go into this decision, including:
• Financial situation
• Employment circumstances
• Lifestyle preferences
• Relationship status
To help you along, here are some of the top pros and cons and associated costs for renting or buying a home based on The Brent Germany Team’s experience.
The Pros of Renting
No Responsibility for Maintenance or Repairs
Every home, no matter who owns it, requires maintenance and repairs over time. Ignore them and they get worse. When you rent, repairs are the responsibility of the landlord or management company (this also can be a con, by the way). If you have a good landlord, your maintenance worries are minimal.
No Property Taxes
A very enticing reason to rent. Property taxes are the second highest cost of home ownership for most people — next to the mortgage payment, of course. Home owners insurance, by the way, is a close third and is often overlooked by new home buyers when working up a budget.
Paying no property taxes as a reason to rent is widely debated, however. If it’s not you, the renter, paying the property taxes it’s the landlord, who is passing on the cost of the tax (and insurance) to the tenant, who is inadvertently paying taxes (and insurance), just not directly.
Moving is Easier
This is the chief reason for many people to rent. You are free to move as soon as the lease expires. There’s no house to sell. This appeals to people who are unsure how long they may be living in an area, who move from city to city or state to state often, or who want to “try” a neighborhood or location before making a large financial commitment.
No Exposure to Real Estate Market Conditions
Home values fluctuate due to changing economic conditions and can decline over time. As a renter, it’s not your concern — it’s the landlord’s.
Credit Requirements are Less Stringent
Landlords require prospective renters to undergo a credit check, and the application is either approved or denied based to credit score and history. As long as there are no bankruptcies or judgments, landlords are likely to rent to you.
Some Utilities may be Included
Multi-unit building owners or owners of smaller units like duplexes and single-family homes may cover some, or even all, of the utilities, including electric, water and sometimes non-essentials like cable TV or internet service.
“Throw Away” Costs
These are additional expenses as a homeowner renters most likely will not have to pay:
• Trash pickup
• Water and sewer service
• Pest control
• Tree trimming
• Pool cleaning (if applicable)
The Cons of Renting
Who is the Landlord?
Is he or she (or the company) easy to work with? Are they responsive and fair? This may not be an issue for little things like painting and lawn maintenance, but when it comes to replacing an air conditioner or appliances it’s not always so easy. Search Google for reviews of property management companies, and there usually is a long list of complaints that it took days, weeks, months to fix issues with rental properties.
Many leases are structured for a year — and with good (or not so good) reason (see below). Once a lease is up, there is no certainty that you will be able to renew for a variety of reasons: the landlord may sell the property, the landlord’s circumstances change (maybe family or friends want to move in), or he decides to raise the rent. The future is always uncertain when you rent. That may be troublesome for some people, less so for others.
The biggest reason people find it difficult to rent is summed up in this old phrase: “My rent is going up.” Rents nationwide continue to rise. This makes it hard to plan future finances when you’re not sure what rent payments will be after the lease expires. Landlords can raise rents as high as they want, and if you disagree, well, adios! Time to find a new place to live. Rent hikes make tenants feel insecure and unsettled.
This is an age-old reason (for some people) not to rent: Every rent payment goes to the landlord and you have nothing to show for it in terms of equity (ownership). Rent costs more in the long run. Imagine renting a home for five or 10 years. The person who pays down a mortgage is going to have equity built up after those five or 10 years but the person who rents has none.
No Federal Tax Benefits
Homeowners deduct property taxes and mortgage interest on federal income tax returns. Renters are not eligible.
Costs of Renting
Renting does not require a costly purchase but there are expenses, including:
• Security deposit
• First month’s rent
• Non-refundable deposits
• Monthly rent (obviously)
• Pet rent
• Renter’s insurance
• Utilities (this varies)
• Laundry (if not included)
The Pros of Buying
When you buy a home a portion of the monthly payment goes to paying off your mortgage loan. Not so much at first but the longer you live in the home, the more equity (ownership) you build. As the price of the home appreciates, the mortgage is reduced and equity rises.
You can use that equity to move into a larger or nicer home, refinance, take out some cash for remodeling projects, or live it alone.
No Payment Hikes!
This sort of depends on whether taxes are built into your mortgage payment. If so, your mortgage will fluctuate a little (or a lot) depending on local taxes. But, in general, when people agree to mortgage terms chances are they will have a fixed rate, meaning mortgage payments will not increase over the life of the loan. That security is comforting for many homeowners.
The House is Yours!
You can do with it what you want. Bright red walls — no problem. Tear out the countertops and change the fixtures — go ahead. It’s your home. (When you rent, depending on the landlord, you’re not allowed to paint, change fixtures, or remodel.) Having freedom to do what you want is one of the greatest benefits of homeownership.
The Cons of Buying
Feeding the Repair and Maintenance Monster
Yes, it’s an awesome feeling that, when you buy, the house is yours and you can do with it what you want. But . . . and this is a big BUT . . . it costs you (not the landlord) to maintain the property and make the needed repairs.
I often tell home buyers that a house, while it seems an inanimate structure, is alive and breathing. Stuff ages. Things break. Repairs are needed. Just like people.
The Brent Germany Team reminds potential homebuyers to think about the cost of home ownership beyond the mortgage payment. Homeowners insurance, which you are required to have, typically will help with the most costly issues like roof repairs and other major damages (depending on the policy), but the rest is up to you — landscaping, installing or fixing ceiling fans, replacing garbage disposers or air conditioners and furnaces.
Money Needed for Down Payment
When you buy a home mortgage companies require you to put down money as a down payment, typically between 3 to 5 percent, although in some cases it can go much higher. I recommend talking with a mortgage lender — even if you don’t need one right away — to know your options.
The Cost of Selling
Unless your home is in pristine tip-top shape — updated, repairs made, perfect-o — there will be a cost to selling your home. Making those repairs and updates to prepare the house for a quick sale are not cheap. Without proper preparation and planning selling a home can be stressful.
Costs of Buying and Owning a Home
Here are some costs to think about when buying a home:
• Earnest money is required if you’re serious about buying a property.
• Down payment is required, usually a percentage of the home’s purchase price.
• Home appraisal
• Home inspection
• Property taxes
• First year’s homeowners insurance
• Other closing costs
• Loan payments (obviously)
• Property taxes
• Homeowners insurance
• Private mortgage insurance
• Maintenance and repairs
• Improvement projects
The End: In My Opinion
Both renting and buying a home have their advantages and disadvantages. Like I said at the start, it comes down to larger issues like your financial, employment, lifestyle, and relationship situations.
If you think you’re going to be in a city for a while — and you (and your spouse) share similar lifestyle goals . . . like living in a neighborhood, fixing up a house to make it your own . . . then buying a home is a no brainer.
But, if you’re unsure of your employment situation or your lifestyle is more nomadic and spontaneous — better yet, if you’re not sure you want the added responsibility and cost of maintaining a home — then renting is the way to go.
In any event, I’ve found that it never hurts to talk to family, friends, neighbors, business associates along the spectrum about what they like and dislike when it comes to renting or owning.