Renting Vs. Buying
In the great debate of renting versus buying your home, it can sometimes seem like there’s no middle ground. Many people either believe renting is throwing money away, or that buying a home is a financial sinkhole.
The truth is, both have distinct advantages, and the right choice for your neighbor may be far from the right choice for you. In the long term though, buying a house and enjoying the increasing value of your own property might be the best option for you.
Is It A Long-Term Location?
When you move into a new home, consider your reasons for moving as well as whether these reasons will be long term or short. If you plan on keeping the same career, building a family, or simply want to stay in the same location for any reason, you’ll likely be looking for a more permanent abode.
That said, consider that ‘long term’ generally means at least 5 or more years.
If you’re moving for a shorter termed reason, such as a work assignment, finishing a semester at school, or just exploring future options, you’d be better advised to look for a more temporary home until you’re able to get your own home.
The reason you need to think realistically about how long you plan to be in your new location has a lot to do with cost, the return you’ll get on a housing investment, and especially convenience.
If you know you’ll need to move for work or after graduating in a year or two, for example, you might not see a return on the investment of buying a home. That’s because it typically takes about 5 years for homes to accumulate a significant appreciation. That said, if you know that you’ll be living in the home for close to 5 years or more, the investment would be wiser, since you’ll be paying to live there long term anyway.
Look At The Bigger Financial Picture
Both renting and buying your home come with extra costs, so you need to consider all aspects of your choice before you make assumptions. When you rent an apartment, it’s true that you’re paying a landlord each month.
Likewise, unless you’re buying your home outright, you’re going to have mortgage payments every month. However, you own your home when you’re paying a mortgage, even if you’re still not done with your repayments.
Because of this, there’s the idea that renting is ‘throwing money away’ since you’re paying into a living situation monthly without gaining any assets to bring a return on all the money you’ve paid in.
However, which choice is more fiscally responsible really depends on your situation. With home purchase also comes property taxes, and other costs such as homeowners insurance, HomeOwners Association (HOA) fees, trash and sanitation fees, as well as fees upon purchase.
You’ll also either need to consider taking care of maintenance and yard work around your home. For some people, the investment in property, equity, and other advantages still far outweigh the other costs associated with home ownership, so it’s a better choice.
While renting doesn’t build your equity, it does allow you to maintain a place to live, although it’s without investing in a more permanent situation. This may be advantageous for people that won’t be in an area long, or whose situations aren’t benefited by the purchase of a home. For many people, this is more ideal than a large purchase at the wrong time.
Price To Rent Ratios
There’s a good way to crunch numbers to compare the value of your choices, without making your head spin. This is referred to as the ‘price to rent ratio.’
Essentially what this does is give a numerical value that shows the difference between the cost of monthly rent and the average purchase price of a property of the same size.
To calculate the price to rent ratio for homes you’re looking at, you need to find the purchase price for a home, and the annual rent for a similar property. Then, you divide the purchase price by the annual rent cost. The resulting number is your price to rent ratio.
To purchase a home the cost would be $200,000. The annual rent would be $18,000 ($1,500 monthly).
$200,000 ÷ $18,000 = about 11
That means your price to rent ratio would be 11.
You’re probably wondering what your target ratio should be, but that depends on whether you prefer to rent, buy, or decide based on the comparison. Generally, if your ratio is above 20 renting is the better option, although if it’s below 20 buying may be better.
There’s no right or wrong when it comes to renting or buying. When you get down to it, there’s only the right or wrong choice for you, your preferences, and your current situation. That said, it’s important not to let your current situation cloud your vision of the future.
Regardless of your current circumstance, there’s no denying the appeal and benefit of the increasing value of having your own property.
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