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Rent or Buy?
That question is easy enough to answer, especially if you take
it literally:
 | A renter is someone who may someday want to own a
home but for the moment is quite happy paying rent on a lease.
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| A home buyer is someone who has actively made the
decision to buy a home, even if it means renting until he or
she has saved up enough money. |
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Are You Better Off
Being A Renter Or A Buyer?
The answer to that question is more complicated. It depends
on a wide variety of factors, including whether your job
requires you to be transferred frequently, and where in the
country you've chosen to live. Deciding whether you really
want to buy a home means taking a long, hard look at both
your finances and your feelings.
Financially, owning a home is often promoted as a better
choice than renting. Currently, there are significant
federal and state tax breaks: homeowners can claim
deductions for real estate property taxes and for the
interest paid on their mortgage each year. In addition,
long-term homeowners build equity (the financial stake or
investment you have in a home)--and their personal
wealth--both by paying down their mortgage and when their
home appreciates in value. Many savvy home buyers increase
their equity more quickly by buying homes that need cosmetic
improvements (such as decorating) rather than structural
renovation (walls need moving). These minor improvements can
significantly increase the value of a home over a relatively
short period of time with a modest investment..
Throwing Money Out The Window
Paying rent, the adage goes, is akin to throwing money out
of the window. There is no long-term benefit financially. As
a renter, you write a check each month to the landlord of
your rental unit, and say good-bye to your money as you drop
the envelope in the mail. A family living in Chicago has
rented the same three-bedroom apartment for nearly 30 years.
Figuring an average rent of $1,300 per month, these tenants
have paid the landlord more than $450,000 in rent during the
years they've lived there. If they had bought 30 years ago,
they might have paid only $35,000 for a unit similar to the
one they've occupied all these years. By now, not only would
their home be paid off (they might have paid around $75,574
in principal and interest on a 30-year mortgage at 10
percent), but they would now own a home worth at least
$300,000, and they would have been entitled to years of tax
benefits.
Are There Situations When Renting Makes Better Sense Than
Buying?
Definitely. If you're going to be in one place for only a
couple of years, buying a home can be a far more expensive
choice than paying rent for the same period of time, even
factoring in the tax breaks. For example, your home would
have to be located in an area with extraordinary
appreciation just to recoup your costs when you sell: a
brokerage commission; city, county, and state transfer fees;
title insurance; and a home warranty for the buyer, among
other costs. If you buy and sell within a short period of
time, you may well end up losing equity rather than building
it.
Renting also makes good sense if you've identified the
general area in which you want to live but haven't made a
final decision as to the specific neighborhood. Buying a
home in a neighborhood you don't know well is one of the top
mistakes home buyers make. If you don't know whether you'll
feel comfortable in a particular neighborhood, it may be
better to rent a house or an apartment there for 6 months or
a year, to get a feel for it. If you like living there and
you like your neighbors, you'll feel much more comfortable
signing a purchase contract and loan documents later on.
Look At Your Financial Situation
It's extremely important to review your personal finances
and determine what you can afford comfortably. It's also
worthwhile to explore your feelings about homeownership.
There is a certain cachet to owning a home. It immediately
connects you to the community in a permanent way. Unless you
fail to pay your mortgage or your property taxes, you will
be able to stay in that home for as long as you
like--perhaps even for the rest of your life. And you, not a
landlord, will benefit from any improvements you make to the
home through its increased appreciation. You can paint your
home any color you wish, expand or reconfigure it to better
meet your needs, and add amenities to make yourself more
comfortable.
Some renters, however, aren't quite ready to plant their
roots. Single people in their 20s and early 30s may prefer
to rent near other singles in a neighborhood that offers a
more active lifestyle. People who are changing jobs or
careers may not want the long-term financial responsibility
that comes with a mortgage and property taxes. Some renters
may prefer to have a landlord deal with maintenance
problems.
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tomorrow...
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