By Humphrey Thomas, ChFEBC, CDFA, AAMS
The rent or buy debate is an important one and it resonates with many because of past economic crises. Sadly, many people lost their homes through the 2008 financial crisis, and many more took a hit on the value of their properties.
Impact of Financial Crisis
But what overall impact has this had on home ownership? You might be interested in the following statistics:
- According to FinancialPlanning, in a five-year period following the economic downturn, 1.2 million people left the ranks of homeowners, while 4.2 million new renters emerged.
- There has been a corresponding boom in the construction of new rental apartments. The Wall Street Journal reported that each year since 2010, construction of apartments and condominiums has grown at a faster rate than single-family homes. In 2015, U.S. builders began construction on 396,600 units in buildings with two units or more – the most in a year since 1988.
Buying Versus Renting
This data points to a shift away from home ownership. But this begs the question: what is the most healthy way forward?Is buying a home still always better than renting? Most of us were raised to accept the conventional wisdom that renting is a waste of money.
The real answer, however, is that there is no one-size-fits-all solution to the rent or buy debate. Home ownership may still be a sound decision for some people, but it’s not always bound to be right for everyone. There are questions that you can ask yourself to assess your personal situation to determine whether renting or buying is the right choice for you.
1. How Long Do You Expect to Live in Home?
An estimated 43 million Americans will relocate this year. Around 40% of those will be work related, and another 18% will be military or government assignments. Obviously, the longer you can stay in a home, the more viable it will be to realize gains by owning it.
You need to honestly evaluate the stability of your life and your job. Renting can offer greater flexibility if you’re not sure where you’ll need to be in the near future.
2. Have You Factored in All the Costs of Home Ownership?
Many people make a false comparison between the cost of paying a mortgage with the cost of renting because they fail to consider all of the additional expenses incurred, such as:
- Property taxes
- Homeowner’s insurance
- Annual maintenance costs (1% to 4% of the home’s value according to HSH.com)
- Pest control
- Realtor fees when selling (typically 6%)
Paying for all these additional costs of owning a home may not be possible for some people. In some cases, renting and "wasting" your money may be the right decision if you are not prepared to pay for these additional costs.
3. Do You Have Enough Savings for Down Payment and Ongoing Maintenance?
Even if home ownership will be advantageous in the future, there are times when renting is the smarter strategy for your current situation. It can give you the time you need to build financial strength so you can safely and comfortably afford to buy. If a down payment will wipe out your entire savings and leave you with nothing left, buying a home may not be the best decision for you.
4. Does Home Ownership Make Sense in Overall Investment Portfolio?
For some people, it can be advantageous to move away from one large investment in real estate, converting your equity into liquid investable assets that offer a better annual rate of return. You still might choose to have real estate as part of your portfolio, but home ownership is not the only way to do this.
For example, real estate investment trusts (REITs) are similar to mutual funds and offer the ability to invest in the real estate market without personally owning property. If the residential housing market slows, rental and commercial properties tend to pick up, and REITs can allow you to take advantage of the sectors that are performing best at any given time.
Renting Has Downsides Too
The above questions might make you question whether buying a house is right for you or not, but keep in mind that renting has downsides too. The biggest unknown is the rate of inflation. A fixed-rate mortgage means that a homeowner can be confident that at least one part of their equation is not going to increase over time. A renter, however, is at the mercy of the market.
And for many people, of course, convenience is the most persuasive factor of all. But even this is a double-edged sword. Home ownership gives you the freedom to renovate and decorate as you see fit, and also to have whatever pets and hobbies you desire. Renting is far more restrictive. On the other hand, renters enjoy other conveniences such as freedom from maintenance chores.
The bottom line is that there are numerous factors that need to be realistically weighed. For some people, buying a home will be a good decision but for others renting can make just as much good sense. Whatever your housing situation is today and whatever you’ve thought of doing in the near future, carefully weighing the options and considering both short and long-term strategies can help you make the sound decisions that you need.
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This article was originally published on Investopedia.