Author: Rebekah L. Nau, CFP®
When you’re moving there’s always a dilemma: should I rent or should I buy?
Many people feel that paying rent is simply throwing money away while owning allows that money to become an investment for the future; however it is often not that simple. Renting or buying can make more sense depending on a number of variables.
Do you plan on staying in the area for a while? If you anticipate needing to move for work or wanting to move to a different location before settling down, renting is probably for you. Owning can be a good investment in time, but buying a home costs a lot up front, including a down deposit, mortgage payments, taxes, insurance, and fees associated with closing a real estate deal. Owning also involves more costs in terms of repairs and maintenance, costs that are often covered by a landlord when renting.
The main benefits of home ownership include tax benefits such as deducting mortgage interest and paying a fixed rate; a mortgage payment is fixed unlike rent which may go up every year and will go up if you move to a nicer place as your income increases. A house is a good investment, not only can the value increase over time, but as you pay your mortgage you build equity which you could borrow from if needed. Your mortgage payments can also help increase your credit score. Finally, the monthly payments force wealth accumulation by paying off an asset you can eventually sell.
A typical rule of thumb to follow is called the price-to-rent ratio. If you can find two similar places, one for rent and one for purchase, you simply divide the purchase cost by the annual rent to get the ratio number.
If this number is less than 12 it is often better to buy, if it is between 12 and 15 you could probably go either way, and if the number is greater than 15 it probably makes sense to rent. This trick is not an absolute rule, but it is a good guide to use if you’re not sure about your decision.
The most important thing to remember when making this decision is to decide on what is best for you financially. Each person’s situation is unique, so don’t base this life-changing decision on how pretty the house down the block is, what your friends are doing, or what you thought you would have by a certain age.
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