Making the decision regarding rent vs. own a home investment is a significant milestone in many individuals’ lives.
It is a choice that carries long-term financial implications and has the potential to shape one’s lifestyle and sense of stability.
Whether you are a first-time homebuyer or considering a change in your living arrangements, weighing the advantages and disadvantages of renting versus buying is crucial.
This decision demands careful consideration of various factors, including:
- financial readiness
- personal circumstances
- future aspirations
COPYRIGHT_MARX: Published on https://marxcommunications.com/rent-vs-own-a-home-investment/ by Keith Peterson on 2023-05-30T17:13:10.324Z
In this article, we will delve into the intricacies of renting and buying a house, exploring the key considerations that can help you make an informed choice.
Learn to evaluate first the benefits and drawbacks when it comes to the issue of rent vs. own a home investment. That way, you can confidently navigate the path towards finding a home that aligns with your goals and aspirations.
Rent vs. buy: Which makes more sense in this housing market?
The real estate market is influenced by various factors, including:
- economic conditions
- interest rates
- housing supply and demand
- regional/local market dynamics
To be properly guided regarding rent vs. own a home investment and make an informed decision, one must understand market trends (e.g., supply and demand).
Data released in March 2023 by the Washington-based Federal National Mortgage Association, aka Fannie Mae, revealed that nearly 80 percent of Americans believe that it’s not a “good time” to buy houses.
Below are some of the results of the Home Purchase Sentiment Index (HPSI) as of March 2023:
|Buying Conditions||Selling Conditions|
|Good Time - 20%||Good Time - 58%|
|Bad Time - 79%||Bad Time - 40%|
|Net Good Time to Buy - negative 60%||Net Good Time to Sell - 18%|
Fannie Mae’s Vice President and Deputy Chief Economist Mark Palim said, as quoted by Norada Real Estate Investments:
With the spring homebuying season now upon us, a large majority of consumers continue to believe that it’s a bad time to buy a home. Homeowners sharing this belief frequently cited ‘unfavorable mortgage rates’ as the primary reason for their pessimism.- Mark Palim, Vice President and Deputy Chief Economist at Fannie Mae
Per Forbes, the May 2023 forecast for the U.S. housing market remains bleak primarily because of these two:
- high prices of houses
- high prices of houses
Sales of houses in March 2023 declined, with experts predicting that the U.S. housing market will face a “sluggish” recovery.
So, considering the rent vs. own a home investment issue, it looks like the latter is losing fans.
In your quest for proper guidance when dealing between rent vs. own a home investment, it will be a good start to know first about renting.
Renting a house is a common and practical option for individuals and families who are not ready or willing to purchase a property.
For those who prefer not to commit to the responsibilities and financial obligations that come with homeownership, it offers:
Basically, renting a house involves entering into a contractual agreement with a landlord or property management company for a specified period, typically six months to a year or more.
To guide you in the issue of rent vs. own a home investment, here is an overview of the key aspects of renting a house:
1. Property Search
In case you will choose to rent a house, you need to note of these things:
|Sources to Explore||Factors to Consider|
|real estate agencies||proximity to amenities|
|word-of-mouth referrals||other important facilities that align with your needs and preferences (e.g., schools for those with children)|
2. Lease Agreement
Once you find a suitable house, you will enter into a lease agreement with the landlord.
The lease outlines the terms and conditions of your tenancy, including the following:
|duration of the lease||security deposit|
|rent amount||maintenance responsibilities|
|payment schedule||other pertinent details|
It’s crucial to carefully review the lease agreement before signing and seek clarifications on any unclear clauses.
3. Rent and Deposits
Rent is the amount you pay to the landlord for occupying the rental property.
Below are some of the factors affecting the amount of rent:
|Is it in (or near)… a residential community?||How far is it from your place of work?|
|… a commercial district?||What are the nearby business establishments (e.g., grocery stores, drugstores, banks)?|
|… a central business district?||Is it near schools, places of worship, and/or public transportation hubs?|
In the issue of rent vs. own a home investment, location is usually the deal-breaker.
b. Property Size
|Is it a studio-type apartment?||Is there a balcony? A yard?|
|How many bedrooms? Is there a maid's quarter?||Is there a basement? An attic?|
|How many bathrooms?||Is there a garage/parking space?|
|How big is the swimming pool?||How’s the drying area?|
|Is there a playground?||Is there a laundromat?|
|Is there a gym?||Is there a communal clubhouse?|
d. Local Market Conditions
- At the time you decided to rent a house/apartment, condominium, or townhouse, is there a current strong demand for rental properties?
- Are there several available condominiums/apartments for rent in your chosen city/region/state?
Landlords may also require a security deposit, usually equivalent to one-month or two-months’ rent. It serves as protection against damages or unpaid rent.
4. Tenant Rights and Responsibilities
As a tenant, you have certain rights and responsibilities that are typically outlined in local tenancy laws.
These rights may include the right to:
- a habitable dwelling
- protection against discrimination
It is important to familiarize yourself with your rights and comply with your responsibilities, such as:
- paying rent on time
- maintaining the property
- adhering to any specified rules or regulations
5. Maintenance and Repairs
In most rental agreements, the landlord is responsible for major repairs and structural maintenance.
However, tenants are usually responsible for day-to-day maintenance, such as:
- replacing light bulbs
- keeping the property clean
- promptly reporting any damages or issues to the landlord
6. Communication with the Landlord
Establishing clear and effective communication with the landlord is crucial.
A few reminders:
- Maintain a professional and respectful relationship.
- Inform them ASAP of any maintenance concerns or repair needs.
- Seek their consent before making any alterations to the property.
7. Renter’s Insurance
While not mandatory, renter’s insurance is highly recommended to protect your personal belongings in case of theft, damage, or accidents.
It can also provide liability coverage if someone is injured on the rental property.
8. Moving In and Out
When moving into a rental house, conduct a thorough inspection of the property and document any existing damages or issues to avoid being held responsible for them later.
Similarly, when moving out, ensure you leave the property in good condition and remove all personal belongings.
In addition, follow the guidelines specified in the lease agreement regarding notice period and property handover.
When it comes to rent vs. own a home investment, below are some common advantages of renting:
You have the freedom to move to a new location or neighborhood without the hassle of selling a property.
This flexibility is particularly beneficial for people who:
- frequently change jobs
- have uncertain living arrangements
- prefer to explore different areas before committing to a long-term investment
b. Lower Upfront Costs
Renting typically requires a smaller upfront financial commitment compared to buying a house.
c. Maintenance and Repairs
The landlord or property management company is usually responsible for addressing issues (e.g., repairs, renovations, regular maintenance).
This can save you money and the time and effort required to handle these tasks yourself.
d. Amenities and Services
Many rental properties, particularly apartments or condominiums, offer additional amenities (e.g., security services and communal areas).
These amenities are often included in the rent, providing convenience and cost savings compared to buying a property and paying for such services separately.
e. Lower Financial Risk
Renting can provide a sense of financial security.
Plus, as mentioned earlier, repairs and maintenance costs are the responsibility of the landlord.
f. Short-term Commitment
Between rent vs. own a home investment, the former benefits individuals who are unsure about their long-term plans.
Renting provides the flexibility to adapt to changing circumstances or life events without being tied down to a long-term mortgage.
g. Access to Desirable Locations
In some cases, renting may be the only viable option for living in highly desirable locations where buying a property is prohibitively expensive.
Renting allows you to enjoy the benefits of living in a sought-after area without the high costs associated with purchasing a home.
While renting can be a suitable housing option for many individuals, it also has several disadvantages compared to homeownership.
Here are some common disadvantages of renting:
a. Lack of Equity
When you rent a property, you don’t build equity or ownership in the property.
- The monthly rent payments only provide you with a temporary right to occupy the space.
- You do not gain any financial stake in the property’s value appreciation.
b. Rent Increases
Landlords typically have the authority to increase the rent at the end of each lease term or periodically.
- can make it challenging to budget for the long term
- may affect your financial stability
- may force you to search for more affordable options
c. Uncertainty and Lack of Stability
Between rent vs. own a home investment, renting provides less stability than homeownership.
Landlords can choose not to renew your lease or sell the property, which may result in the need to move frequently.
This uncertainty can:
- disrupt your life
- create additional expenses
- make it harder to establish a sense of community
d. Limited Financial Benefits
Unlike homeowners, renters do not benefit from tax deductions related to mortgage interest or property taxes.
Additionally, rent payments do not:
- contribute to building long-term wealth
- serve as a retirement asset
e. Inability to Build Long-Term Wealth
In the issue concerning rent vs. own a home investment, homeownership can provide an opportunity to build equity and accumulate wealth over time.
Renting, however, does not offer this potential for long-term financial growth.
It is because your monthly payments do not contribute to building an asset.
Is it? Is it not?
For Garrett B. Gunderson, the CEO of Wealth Factory, a Utah-based financial consulting firm, and a best-selling author, the answer is a resounding “no.”
In his December 2020 Forbes article, he stressed how buying a house makes one not only get tied up in mortgages but also incur several expenses (he cited furniture and repairs as examples).
My point is: you might not be factoring those costs in when you consider what you paid to acquire that asset versus what it’s worth when your mortgage is paid off.- Garrett B. Gunderson
Though he acknowledges that buying a house is “important,” for Gunderson, it is not “a great financial investment.”
Renting Vs Buying A Home 2023 (The 5 Year Rule)
Between rent vs. own a home investment, many tend to choose the latter.
It represents a milestone in one’s life and offers:
- a sense of stability
- personal fulfillment
When considering purchasing your own house, several factors come into play, ranging from financial considerations to personal preferences. These will be discussed later.
For the meantime, focus on the pros and cons of buying a house.
It is not easy to decide between rent vs. own a home investment because buying a house and renting both have their own advantages and considerations.
Here are some advantages of buying a house compared to renting:
a. Equity and Investment
When you buy a house, you can build equity over time.
As you make mortgage payments, you gradually own a larger portion of the property, and it can potentially appreciate in value.
This can be seen as a long-term investment that can provide financial stability and even generate wealth.
b. Potential Tax Benefits
You may, for example, be able to deduct mortgage interest and property taxes from your taxable income, which can result in significant savings.
c. Potential Rental Income
If you have extra space in your home (e.g., a basement or an additional unit), you may have the option to rent it out.
This can generate additional income and help offset the costs of homeownership.
d. Long-Term Cost Savings
Buying a house often involves higher upfront costs (e.g., down payment and closing costs).
And why is that?
As you pay off your mortgage, your housing costs may become more predictable and stable, whereas rent can increase over time.
e. Potential Appreciation
Real estate has historically shown the potential for long-term appreciation.
While it’s not guaranteed, if your property increases in value over time, you may benefit from capital gains when you decide to sell.
Buying a house comes with several potential disadvantages compared to renting.
Here are some common drawbacks to consider:
a. Financial Commitment
This is where the rent vs. own a home investment issue comes in quickly as buying a house typically involves:
|a substantial down payment||homeowner’s insurance|
|monthly mortgage payments||maintenance costs|
|property taxes||potential repair expenses|
Renting, on the other hand, usually requires a smaller upfront payment and a fixed monthly rental amount.
b. Market Risks
The value of a property can fluctuate based on the real estate market.
While homeownership can potentially provide long-term appreciation, there’s also a risk that the value of your property could decline, leading to potential financial losses.
Renting eliminates the risk of property value fluctuations, as you are not directly invested in the real estate market.
c. Upfront Costs
Buying a house involves significant upfront costs associated with the home buying process, such as:
- down payment
- closing costs
- inspection fees
Renting usually requires a smaller initial financial commitment, often limited to a security deposit and first month’s rent.
d. Uncertainty of the Future
Several things can change over time, which can potentially impact your finances, such as:
- economic conditions
- interest rates
- property taxes
Renting provides more flexibility in adapting to such changes.
Still weighing the pros and cons of rent vs. own a home investment? Or, you have already decided to do the latter but still feel a bit uncertain?
Here’s a piece of advice from Donna Fuscaldo, a veteran financial reporter and personal finance expert. In her updated Investopedia article dated June 2022, she wrote:
Calculate your entire debt-to-income ratio: all your monthly expenses divided by your gross income to determine if a home is affordable.- Donna Fuscaldo
Three important things to remember:
1. You made a budget.
2. You have a checklist of the things you want and the things you need.
3. You conducted an inspection of the place.
LawDepot.com recommends checking the following for damage/problems:
- doors and windows
- floors, walls, ceilings
- HVAC (heating, ventilation, and air conditioning) system
- electricity and lights
- indications of existing pests
- parking (if available) situation
Understanding the background and process of buying a house can help you navigate this important undertaking.
Here are some things to consider:
a. Financial Considerations
|down payment||typically ranges from 5 to 20 percent of the property’s value|
|mortgage||a loan obtained from a financial institution, with the house itself serving as collateral|
|closing costs||e.g., appraisal fees, attorney fees, title insurance, and property taxes)|
|monthly mortgage payments||include principal and interest|
b. Market Conditions
- real estate market (can fluctuate, impacting housing prices and availability)
- mortgage interest rates
c. Location and Property Selection
- neighborhood (proximity to schools, healthcare facilities, amenities, transportation, and safety)
- property features (assess your needs and preferences)
d. Legal and Procedural Aspects
|real estate agents||deal with licensed ones|
|property inspections||conduct a thorough inspection of the house before purchase|
|legal documentation||e.g., purchase agreements, mortgage contracts, and title deeds|
Observe the 28-percent rule; that is, per Investopedia, “your mortgage should not cost you more than 28% of your gross earnings each month.”
Investopedia, however, clarifies that this commonly recommended rule is not always applicable to all home buyers.
Buying a House: How to Prepare Your Finances First | WSJ Your Money Briefing
With all the numerous but reasonable considerations, indeed, it could be a challenge to pick between rent vs. own a home investment.
You must really assess your financial situation.
As Diana Olick, an Emmy awardee and CNBC real estate correspondent, was quoted saying in an April 2023 CNBC article:
This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high.- Diana Olick
With that said, to determine how much you can comfortably afford a rent or a monthly mortgage payment, evaluate your:
- existing debt obligations
Ultimately, the decision between rent vs. own a home investment depends on your personal preferences, financial situation, and long-term goals.