Renting Vs. Buying Your First Home: Pros and Cons
You have probably heard someone say this before (maybe an investment “guru” on the internet)
“Do not rent a home if you can afford to buy one. When you pay rent, you are simply helping your landlord pay off the mortgage on their rental property. Instead of paying rent, redirect that money to pay for the mortgage on your own home!”
Like several things in life, there is some truth in these words, but it is not the entire truth. As Westside Management Team says, the decision to rent or buy a home is different for everyone because people have vastly different circumstances. That is why a sweeping statement about the rightness of renting or owning your home does not make sense.
If you are reading this, it’s probably because you have saved up enough money to buy your home, but you are wondering if you should go ahead with the decision. You may also be reading this to get some ideas on the best ways to plan your future.
So, should you keep renting or buy your first home?
That is a monumental question, and your decision could forever fix the trajectory of your life. We cannot make this decision for you, but we can lay out the facts so you can make your own choices. What are the things you need to know before making this all-important decision?
The pros and cons of renting
- Affordable: The monthly rent on your rental property covers all your housing costs for an entire month. Even if there are problems with the rental, they are not yours to fix. You are not expected to pay for the property’s insurance or settle its maintenance costs. Renting lets you live a hassle-free life.
- Flexible: As a renter, you have the freedom to move whenever you want. You can easily take advantage of opportunities in other places. You may also live in a neighborhood where you would normally not be able to afford your own home.
- No control: Being a renter deprives you of the right to do what you want in your home. You must live with the design choices of the owner. You cannot customize the house to make it suit your preferences if the owner doesn’t agree to those changes.
- Less stability: As a renter, you do not have the power to make long-term plans that include the home you live in. If your landlord chooses to terminate your lease, you have to move out. You may also be forced to move out of the home if the owner raises the rent above what you are willing or able to pay.
The pros and cons of buying a home
- Control: Owning your own home gives you control of your life. You know where you will be living in the coming years. It’s easier to plan because you have more control over the variables that can affect those plans.
- Equity: As a homeowner, the money you pay a mortgage company is an investment. You get returns on it in the form of equity. The value of your home can increase to a point where you make a substantial profit on your original investment.
- Unpredictable costs: Problems in your home can impact your current financial position and threaten the market value of your home. The cost of fixing these unexpected problems can limit your ability to take advantage of new investment opportunities.
- Inflexible: Owning a home makes it harder to take advantage of opportunities available in other locations. It can take many weeks to find a buyer if you decide to sell your home. This makes it harder to respond to events in your environment.
The most important consideration: the opportunity cost of each option
The final and most important consideration when deciding to buy or rent your home is the opportunity cost of each decision. To buy a home, you must invest 20% of the market value of the property as your down payment.
What other investment opportunities are you foregoing to make this investment? Does that investment offer a higher or lower ROI than the ROI on your property?
Calculating the opportunity cost of buying a home versus renting; is not as simple as comparing the rent to the monthly mortgage. This calculation involves comparing the unrecoverable cost of owning a home versus the unrecoverable cost of renting a home.
How do you determine those costs?
That is one of those decisions where you need the expertise of a competent financial adviser and experienced real estate consultant. These experts can assess your current financial situation against your future goals to help you make the right investment decision.
Does this sound like something you would want? If you are at a crossroads in your investment journey and not quite sure which direction to take… offer you the objective opinion of a neutral third party to help you make the most profitable decisions.