Renting can leave you feeling like you’re paying your landlord’s mortgage, while home ownership comes with its own share of stressors, such as maintaining your house for future resale value.
We all have concerns that we’re doing the right thing, and spend a large percentage of our income just to have a place we can call home. To truly understand if buying or renting is the best choice for you, let’s first dispel a few common myths around renting vs. buying.
“If you rent, you’re throwing money away”
Whether you’re paying rent to your landlord or giving mortgage payments to your bank, you’re paying money to live somewhere. Even if home ownership comes with smaller monthly mortgage payments than monthly rent, there are costs that come with home ownership that don’t come with renting. Homeowners have to deal with property taxes, home maintenance and repairs and insurance. If you’re renting, you’re not putting money into a house, but homeowners with mortgages are paying not only for the house, but are also paying the bank interest on the mortgage. The biggest reward a landlord reaps is the equity they build for the time their tenants lease the property.
“Buying real estate is a good/quick investment”
Historically, you’re more likely to see better returns in the stock market than in real estate, so if your primary goal is to make quick money, buying a house is the most efficient use of your money. However, the volatility of the stock market over the past decade is well known. A home you buy and live in has utility, whereas stocks do not; this is not an apples-to-apples comparison. There are many factors involved in the growth of the value of the house—price, renovations and additions, and rent growth rates in the area. As a homeowner, how much money you can make off the house also depends on factors like how long you plan to have the house before selling.
“Renting is cheaper, you don’t pay for house maintenance”
It’s true—you don’t have to pay for things like a new roof or rusted pipes if you rent rather than own. In most cases, the owner will repair most major items that effect the habitability of a property (even though we all have heard horror stories of owners and property management groups dragging their feet or refusing to get repairs done.) But consider this, if you’re paying a monthly mortgage payment, your payment is locked in. If you’re a renter, your rent will typically rise each year with the market value of rent in your area. Recently, rents have been rising significantly quicker than incomes, which makes buying a more attractive option for many. While you should do the math for your own circumstances, there’s strong evidence that buying a house is cheaper than renting here in Northern California, including costs like house maintenance.
It’s important to recognize that these blanket statements don’t apply to you. If you’re considering making what may be the largest purchase in your life, you should do your due diligence and compare rental payments vs. what a monthly mortgage would be. Likewise, you shouldn’t rationalize that you should continue renting because you don’t have to pay for house maintenance, when it’s very possible that you could find a house to buy and pay less overall in the long run than you would by renting.
If you’re a renter considering buying, ask yourself, “Why do I want to buy?” If the answer is one of the above myths, push those to the side. Maybe you have a dog, and can’t find a property to rent with a yard or that accepts pets. Maybe you want to start a family, and want to have a stable place to live. Likewise, if you’re a homeowner considering going back to renting, ask yourself why. Maybe you’re considering moving multiple times in your near future. Maybe you don’t want to be bothered with home maintenance. The point is to remember there are lifestyle pros and cons involved when it comes to buying versus renting, so think about how much you are willing to pay for those, despite the hard math. One large factor could be the tax implications.
Homebuyers get a host of tax benefits that renters don’t — critical deductions that can lower your overall tax bill.
But how much do homeowners really save on their taxes? Using 2016 IRS data, the most recent available, we calculated that a homeowner who took the average for each of the below tax benefits would claim $15,871 in home-related deductions (if he or she itemizes).
1. The interest they pay on a mortgage
2. The points they pay on the mortgage
3. The cost of all property taxes
4. The cost of insuring their mortgage
5. Residential energy-efficient tax credit
Those are just the start: And years from now, when they sell their home, most of them won’t owe taxes even if they pocket up to one-half million dollars in profit, unlike other investments that typically are taxed at 15% or more.
Renting still makes sense for many, particularly when you’re in transition or with credit challenges. But you can’t deduct rent on your income taxes. That’s why it’s important to consider the tax benefits when you consider the advantages of buying vs. renting.
The hard math
To figure out whether renting or buying is best for you in terms of pure money, you need to answer these questions for your own circumstances: What area are you looking to buy? What’s the expected house price growth in that area? How long would you stay there? And many, many more. This rent vs. buy calculator covers all the bases. It even assumes that, if you rent, the money you would’ve spent on your down payment is invested in stocks or other investments. Do some research in your area to see if it’s better to rent or to buy. The best thing about this calculator is that it’s easy to see which factors have a large impact (home price, home price growth rate in a given area, investment return rate) and which factors have a minimal impact (length of mortgage, closing costs, inflation rate) on whether it’s better to rent or to buy.
If you’ve done the math, thought over the pros and cons of renting versus buying for your lifestyle, and decide that you want to own a house, please feel free to reach out to me. I can get you in contact with a mortgage consultant who can help qualify for a home loan. There’s a lot of conflicting information out there, and a lot of people that may not have your best interest in mind when trying to help you with blanket statements. If you’ve been wrestling with whether to rent or buy, hopefully going through the above steps will give you some peace of mind.
About the Author: The above Real Estate information on Renting vs. Buying was provided by Mike Vera, a recognized real estate broker in the Bay Area. Mike can be reached via email at email@example.com or by phone at 925-813-0220. You can also find additional information at http://www.michaeljvera.com. Mike has helped his clients move in and out of many Bay Area cities for the last 14+ Years.
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