Rent or Buy?
If you had asked me ten years ago whether I thought you should rent or buy, I would have suggested you buy if you were planning to stay in your new home for two or more years. Houses were selling quickly, and home values were consistently high. However, after the 2008 housing crash, that all changed. Now, the answer isn’t as simple. In general, it makes sense now to buy if you’re planning to stay in your home for five years or more. However, there are several other factors to consider.
What Happened to Homeowners During the Financial Crisis?
The 2008 financial crisis was caused by several different things happening in the financial services industry simultaneously. One of the contributing factors was a fall in the housing market. Banks had started to offer mortgages at 100% of the home’s value (or more, in some cases) to borrowers with subpar credit, then turned around to sell these mortgage-backed securities to investors. To make a long and complicated story short - this did not end well. Investors lost their money, the stock market crashed, and many homeowners were forced into foreclosure.
As a result, an increasing number of people have turned to renting over home ownership in the decade since the financial crisis. For many, renting is a way to prevent the financial and emotional hardship of losing your home and a significant portion of your money to a mortgage that you can’t repay.
When Should You Rent?
It’s tempting to look at renting a home as the solution to potential mortgage trouble in the future, and it’s true that renting a home has several benefits:
- Financial flexibility. You’re able to reduce your rent by simply relocating, and without the financial headache of trying to resell your home.
- Location independence. You’re not tied to your home when you rent, which makes moving for new job opportunities, to be closer to family, or to explore a new part of the world that much easier.
- Less consistent financial burden. When you rent a home, you aren’t as invested in the home’s upkeep. Larger maintenance costs are often outsourced to your landlord, and other costs typically associated with home ownership aren’t a concern including property taxes and more.
- No down payment required. Although you may need to put down a small security deposit for your rental, you’re not on the hook for a 20% down payment like you would be if you were purchasing your home. This frees you up to focus on other financial goals such as debt repayment or saving for retirement.
When Should You Buy?
Of course, renting isn’t always an ideal solution. There’s something intangible about homeownership that drives people to buy houses. Having a space that’s all your own is incredibly appealing, and there are some situations where buying a house can be a good investment:
- You’re planning to live in a home for five or more years. Living in a house for five or more years can help to guard you against the potential financial loss of selling your home quickly after making the initial purchase. It can also help you to start building equity - making your home an investment.
- You want more flexibility in your living space and lifestyle. There are certain things that you just can’t do as a renter - like make home modifications, ensure a level of privacy (this is especially true if you share walls with someone in an apartment complex), or decorate the way you want to.
- You value the financial benefits associated with home ownership. Although there are some financial downsides to owning a home, like unexpected repair costs or a sizable down payment, there are also several benefits. In markets where more people are moving in and demand is strong, your home will likely appreciate in value over time.
Additionally, property taxes and mortgage interest payments are tax deductible.
- You have a sufficient down payment and rainy day fund for home repairs. If you’ve saved up a sizable nest egg and earmarked it for a down payment or unexpected costs associated with home ownership, you may be ready to take the leap and buy a home. Typically, it’s recommended that you save a minimum 20% down payment to avoid PMI (Private Mortgage Insurance) which adds to your monthly mortgage costs.
What’s Right For You?
Buying a home isn’t something you should go into lightly. For many people, it makes more sense to rent to avoid the potential downsides associated with owning a home or to protect themselves against a financial loss if they plan to move around frequently. However, for some people, purchasing a home can be a financial investment that lines up with their long term goals. If you’re on the fence, consider speaking with a financial planner to help you determine what course of action is best for you and your family. They’ll be able to provide an unbiased third-party evaluation of your financial life, and determine where home ownership fits into your big picture.