It’s often difficult to decide whether to buy or rent a property, especially if you’re a first-time home buyer.
In this article, we outline the main differences between renting or buying and why you should choose one over the other. While most people obviously prefer buying properties over renting due to reasons like mostly being a good investment, there are also plenty of reasons why you shouldn’t buy a property in the first place. Well, at least not yet.
Table of contents
- Things to consider when deciding when to buy or rent
- Buying a house
- Buy or rent: Which one is it?
Do you think you’re ready to buy? There are things you need to ask yourself first…
It is true that buying your own home is one of the most important decisions you’ll make in your life. Unless you’re someone who thinks that money is no object and planning to buy your first home in cold hard cash, deciding to purchase is almost a life-long commitment.
To help you decide whether to buy or rent, you must answer this basic question…
“Are you ready to buy a house?”
If you’re still unsure, there are a couple of things to think about before you jump on the housing bandwagon.
1. Do you have existing debts?
Owning a home (or another home) means that you will enter into another debt contract, which is commonly the case among new owners.
- Do you have student loans?
- Are you paying a car mortgage?
- Do you have credit card debt or other debts?
- Or do you have a business that requires you to constantly shell out money for capital?
- But more importantly, is your budget prepared for another wave of debts in the coming 10 to 30 years?
It may be that your finances can handle all these debts at once, but if you feel that you’re likely to have problems when all these expenses come together in the foreseeable future, then perhaps buying a home isn’t the right choice for you. For now.
2. Do you plan to stay in one place for 5 years at least?
When it’s not the finances, it’s often your lifestyle that can affect your decision to buy or rent a home. For instance, if you’re likely to get relocated in a few years or if you love to travel the world and live in different places, then there are better options for you, like renting or buying a mobile home instead (people who love to travel are going tiny these days).
Purchasing a house is best for individuals with plans to settle down preferably indefinitely. It’s a wonderful experience owning a home and being able to ACTUALLY live in it and you’ll miss out on this if your lifestyle won’t permit you to stay in one place for a long time.
3. And more importantly, do you have enough money for everything that comes with home ownership?
How much house can you afford? Experts suggest that your mortgage should be no more than 25% of your income. This is because there are some financially daunting expenses involved in buying a home:
1. Down payment.
According to CNBC, setting aside large upfront payments like down payment often keeps people from buying.
Why? Every aspiring homeowner should have a large sum set aside for the down payment. In New York, the minimum is 20% of the listing price so you won’t be charged a private mortgage interest (or the dreaded PMI) on top of your mortgage.
But what about FHA loans offering 3% down payment you say? Yes, FHA loans are available in NYC but unlike other states, there are very limited properties that can qualify for an FHA loan given the type of properties available in NYC.
Sadly, if you do find a property that qualifies for an FHA loan with a low down payment, you will need to pay PMI as protection to the lender. For more information, check out our article on SONYMA here.
2. Monthly mortgage.
It’s an exciting thing to own a new house but the reality is, you should check if your finances can accommodate the repayments on top of your existing debt and other expenses.
Think about this: you should still be able to live comfortably when buying a home. It’s not right to have nothing else to spare for living expenses after you pay your monthly mortgage. Use this mortgage calculator to help you out.
3. Expenses that come with home ownership.
Your mortgage is just the start. And this is not an exaggeration. There are fees that may come as a surprise to you during the buying process, like the closing costs, mansion tax, title insurance and tons of other fees depending on the kind of property you’re purchasing.
On top of all of these fees are upkeep expenses and HOA (homeowners association) fees depending on where you live. In short, you have to be extra prepared for these fees before you dive in.
That’s why working with agents (or a company) offering real estate commission rebates can come in handy when buying a house.
But are there any exceptions?
What if you fall in love with the house? or if this is such a great deal?
The short answer is no. Whether market prices may be at their all-time low, property prices around your area are building up or whether you’ve found your dream home—as long as you’re not financially ready for this enormous responsibility, you may consider renting for a while.
Pros and Cons: Buying a House
Let’s say even after these considerations above you know that you can afford a new home. Then congratulations, you’re one step closing to owning a new home. However, let’s first discuss a few things to help you decide whether to buy or rent, as the pros and cons of buying a house.
Buy or Rent: The Pros of Buying a House
1. Buying a home is clearly an investment.
Unlike renting, your money is actually going somewhere—it’s going to your equity and by the time you’re done paying your mortgage, your house is yours to sell.
2. Your home will probably appreciate in the future.
While the thought of recession or a looming depression is scary, you can count on property values appreciating in the future. More often than not, your house will be worth more in the future. There is a possibility of profit should you decide to sell.
3. Property taxes? Tax-deductible!
Although there are plenty of fees involved in owning a home, some of these expenses, like the property tax, are tax deductible.
4. Your house, your rules.
With renting, you can’t do as much home improvement as you’d like without the approval of your landlord. In cases where improvements are allowed, some tenants usually hesitate to spend on renovations since the house isn’t theirs to keep (and in some cases, there are no refunds offered).
Having no landlord to “lord” over you means there are no surprise visits or inspections of the property in the future. And not having to share the space with anyone else would mean that you wouldn’t have to deal with nosy roommates who like to “borrow” your stuff without asking your permission.
6. You’re the boss of your property.
You’re your own boss—there isn’t someone else you need to answer to since it’s your house. Although you may still be subject to your HOA agreement and local building and state codes, you can do [almost] anything to your property at will.
7. The joy of owning a house!
Owning a house is THE American Dream! It gives you a sense of accomplishment and pride. It feels great to get what you want and what you’ve worked hard for.
Buy or Rent: The Cons of Buying a House
Sadly, owning a house isn’t all rainbows and sunshine. While clearly there are benefits like possible tax deductions, freedom to renovate and investment returns, there are also disadvantages to purchasing a home, which may you think twice before you decide to buy or rent.
1. You can’t just relocate at whim.
Buying a home means that you have to stay in the area for at least the next 10 years (or until you’re done paying the mortgage). This limits your ability to relocate or find a new job that’s not within your area. Having a house to maintain may also dampen your ability to travel—not only because of the upkeep expenses but also because you don’t want to leave your house for too long.
2. Maintenance fees nobody is prepared for.
You may have rejoiced at the thought of “my house, my rules” but this also means that you’re also responsible for keeping your home in tiptop shape. You’ll have to learn the basics—like plumbing, changing the bulbs, landscaping or repainting—or else you’ll have to pay $$$ to experts to do these for you.
3. Hidden charges.
Depending on where you plan to live in the US or depending on the kind of property you’re planning to purchase, you may need to save up for other fees like HOA (homeowners association), taxes and closing costs. In New York, you may need to fund these extras:
- Title insurance (condos only). 0.45% of the purchase price as protection for both buyers and lenders from any title claims prior to the condo or apartment purchase
- Mortgage recording tax (condos only). NY condo owners need to pay 1.8% of the listing price for homes below $500,000 and 1.925% if the home is valued above $500,000
- Mansion tax. Mansion tax (1% to 3.9%) is applicable to properties valued over $1M.
- NY Transfer Tax. Condo buyers are required to shell out 1 to 1.45% of the home listing price for New York City Real Property Transfer Tax plus $0.45 to $0.65 for NY Transfer Tax.
- Attorney and other fees. While brokers are usually free for the buyer, having other people on board like the real estate lawyer or inspectors would mean additional expenses for you. Experts say that lawyers in NYC charge up to $4,000 in fees (or more).
- Other closing costs. Appraisal fees may take you up to $1,500 and banks may charge $750 for the transaction.
If you want to save when buying a home (even with these expenses), you may need to consider hiring an agent who can share up to 50% their commission with you, like HomeFlow. For more information on this, check this out.
4. Negative equity.
Should property prices drop in your area as a result of economic crisis or if you have had a mortgage that’s worth more than the actual value of your home, then you are in danger of negative equity.
Negative equity means that the property value of your home is much lower than the mortgage you took for it. So even if you sell your home, it won’t still be enough to pay your outstanding mortgage.
Given these risks, you shouldn’t consider buying a home just because of things like:
- peer pressure
- the best offer in the world
Unless you have the financial capacity to sustain your mortgage repayments until the end of your contract.
Pros and Cons: Renting A House
While owning a house may be one of the best things in the world, it isn’t often the best choice for you especially if you haven’t sorted out your finances.
After all, buying a house isn’t as simple as buying a new dress or a new watch—it involves a deeper financial commitment from your end and it often lasts decades. Imagine making a wrong decision of buying a home today and suffering the consequences for the next 10-20 years—ouch!
Do you find it difficult to decide whether to buy or rent? Here are 5 simple reasons why you should put off buying your dream home:
1. You’re still not done with your student loans and other loans.
While there are many contentions on whether you should pay off your student loans or other loans before you decide to buy, it would make sense to hold off buying a property if you are already neck-deep in debt.
2. You’re mobile.
If it is your job to get sent out to various locations for a time, then you should just rent. Even if you like your current assignment, if you won’t last more than 5 (or more years) in the area, buying a house would just be stressful in the end. Think about it—you’d have to sell the home early if you get relocated again, which would put you in a difficult position if you don’t have buyers in line.
3. You have tons of expenses.
I’m sure we can all relate to this, regardless of whether you’re a parent of 2 or more kids or someone who’s just living by yourself. Utility bills, medical expenses, gas money, food expenses… and the list goes on!
If there is no space for a mortgage in your budget, the safer route to life is to just rent a space or a house so you can have extra money for savings or emergency expenses.
4. You need time to plan.
Even if you think you can afford a house right now, you think you need more time to plan. After all, buying a house is one of the most important decisions you’ll make in life—not that it needs to be perfect, but because you want to prepare yourself for the responsibilities that come with purchasing a new home.
Buy or Rent: The Pros of Renting
For a lot of people, renting is a more convenient and logical choice to make for the following reasons:
1. Ability to move with ease.
Whether you’re traveling or relocating for work, renting gives you the ability to move from one place to another with ease. With renting, you wouldn’t have to worry about being able to sell your place before moving or leaving your place with no one else to look out for it when you’re gone.
2. Almost zero upkeep.
When you rent, it wouldn’t be responsible for the repairs or renovations needed for the property (although you should make sure this is stipulated in your contract). While the fees aren’t necessarily zero, maintenance expenses are very minimal when you’re renting the place.
3. Financial freedom.
In many cases, renting a house is considerably cheaper than purchasing a home. You can save a lot of money by renting and you can have the freedom to spend your money on things that you find valuable (like traveling, growing your money in the stock market).
4. No taxes and hidden fees.
It’s no secret that the process of buying a home isn’t as linear as you’d think and in some states, there are extra fees that come with the purchase of a home. Additional taxes and fees like we’ve discussed in the last section often take new homeowners by surprise. While there are still fees you need to pay when renting, they’re nothing compared to fees and taxes owners need to take care of.
Buy or Rent: The Cons of Renting
According to the famous Dave Ramsey, renting is not at all a waste of money since you’re paying the rent to have somewhere to live in and as long as you have that somewhere to live in, your money is going somewhere valuable too.
However, while renting is also the best choice individuals who are looking to become more financially liberated, there are also disadvantages to renting, like the following:
1. The landlord may raise the rates eventually.
While mortgage repayments are more or less constant for the loan period (unless buyers have variable rate mortgages for their homes), tenants are vulnerable to looming rent increases as mandated by their landlords. The owners can implement a steady increase in the rent for the next years, which may come as a shock to tenants who haven’t carefully studied their rent or lease agreements.
2. Less freedom to improve the property.
If you need repairs or home improvements, you still need to consult your landlord before making a move. In some cases where you can improve the home, the owner may not grant you a refund depending on what’s stipulated in your contract.
3. Say goodbye to tax deductions.
Although not all property taxes are tax deductible (there are exceptions, like in the case of expensive properties), you won’t have tax incentives when you rent.
4. Zero investment (as opposed to buying a house).
While we have established that your money is still going somewhere when you rent a home, the sad thing about that is there won’t be any return of investment in the future when you rent. Albeit paying the mortgage is financially difficult, the buyer can sell the house (even for a profit) after the contract ends.
5. The landlord may evict you.
Should your landlord decides to sell, you might be forced to leave the property since he has the final say. Although you may have some protection in your contract, you may have to leave eventually since the property isn’t exactly yours.
Buy or rent: Which one is it?
There is not a one-size-fits-all answer to whether you should buy your first home or just keep on renting for the time being.
However, what we would like you to know (and what most experts would advise) is that you should consider your financial capacity first (among other things) before you decide whether to buy or rent.
It’s also not easy to say that it’s cheaper to rent because, in some instances, it is more expensive to rent properties in prime locations (for instance, Manhattan) than to buy a property in the suburbs or the outskirts.
The size is another thing to consider—often, the larger properties can cost more than the smaller ones, but again, this depends on where you’re planning to live.
Both are great decisions to make and we’re sure that there are groups of people who will find one better than the other. If you need to decide whether to buy or rent, make note of what you need and factor in things that matter to you (like the size of the home, location, future market value, accessibility, and others) so you can decide.
If you still find it difficult to decide whether to buy or rent, you can always talk to us!
What are your thoughts? Write them in the comments below!