Renting vs. Buying: Part 2 – Advantages and Disadvantages of Renting

In today’s market, renting an apartment or house can be a wise decision in certain circumstances, but typically is not a good long term solution.  See Renting vs. Buying: Part 1-Which Is Better? to help determine which may be the better option for you.

Benefits of Renting

  • Maintenance is included in the cost of rent. If the stove stops working, you are not responsible for fixing the stove or for purchasing a new one.
  • Yard Work is included in the cost of rent.  While this is also the case in many condos and townhomes with HOA dues, it is generally not the case with houses.
  • Amenities are often abundant in apartment complexes.  Gyms, pools, meeting rooms, coffee bars, etc. are usually included in the cost of rent.  While some neighborhood communities may also have these, they tend to come at a price.
  • Utility Bills tend to be lower in apartments due to the smaller size of each unit.
  • Moving is quick and easy.  No need to put a home on the market and wait for it to sell.  A 30-60 day notice is all that is usually required in order to vacate the property and move elsewhere.
  • No Down Payment is required when renting.  Though a security deposit, pet deposit, and one or two month’s rent may be required upfront, this cost is usually significantly less than a down payment.

Disadvantages of Renting

  • Noise may be an issue in apartment complexes because you often have neighbors on either side of you, above you, and below you.
  • Rent Increases often occur annually.  Short term leases and month to month leases are generally considerably more expensive than a one year lease.  Want to stay for three months after your lease expires?  That could be billed at the much higher monthly rate.
  • Parking may be a daily struggle.  With so many people living in such a small area, a convenient parking spot may be hard to find.
  • Rules about what colors you can paint (if any), how you can mount a TV, how you can hang drapes, which pets you can keep (often for a fee), where you can park, when you can pick up packages from the office, etc.
  • Equity is not built via rent payments.  In other words, at the end of the day, your payments are not helping you own anything that can be sold later.
  • Landlords can be hit or miss.  An apartment complex or management company can be researched, whereas many individual landlords cannot.  They may live out of state, may have hundreds of properties they manage, or may be easy and responsive.  It’s hard to know ahead of time.

There are also advantages and disadvantages to purchasing a home.  See Renting vs. Buying: Part 3 – Advantages and Disadvantages of Buying

Renting vs. Buying: Part 1 – Which is better?

It’s time to move.  Do you rent or do you buy?  This age-old dilemma faces professionals relocating for a job, empty-nesters that are downsizing, young people moving out of the family home, newlyweds starting a life together, and growing families in need of more space.

How long do you expect to live in your new residence?

The longer you plan to stay, the more sense it makes to buy a home.  Generally, if you plan to stay more than five years, you should consider buying.

While this may be a good rule for most situations, there are instances where even a one year home purchase makes sense.  For example, in purchasing a home that needs cosmetic updating, you’ve given yourself the possibility to build equity in your home faster than simple appreciation.  By this same token, buying a new construction home, living in it for five years, then selling may not be a good decision.

If you’ll be moving within the first few years and are not interested in building sweat equity in your home, renting may be the best move for you.

The current stability of your life is another thing to consider.  Is your job stable?  Are you expecting that you’ll continue to earn raises and bonuses?  Will you be getting married, having children, or relocating to be with aging parents in the near future?

How do the monthly costs compare?

There are hidden costs in both buying and renting.

In buying, you need to consider property taxes, insurance, HOA fees, utility costs, and building a slush fund for unexpected repairs (dishwasher, stove, water heater, HVAC, refrigerator, etc).

In renting, you need to consider annual rent hikes, moving costs if you plan on moving often, pet fees, and security deposits.

Do you have savings for a down payment?

While it’s true that you do not need a 20% down payment, you will typically need money for a down payment (may be as low as 3.5% of the purchase price), closing costs, and moving expenses.

Renting vs. Buying: Part 2 – Advantages and Disadvantages of Renting

Renting vs. Buying: Part 3 – Advantages and Disadvantages of Buying

Renting vs. Buying: Part 3 – Advantages and Disadvantages of Buying

There are advantages and disadvantages to owning your own home.  Which is best for you?  That depends on your current and future plans.  This guide presents the pros and cons for buying.

Advantages to Buying

  1. Customization – You can choose to what colors to paint, what renovations to make, and you can make your home more energy efficient.  The possibilities are endless without having to ask a landlord.  You’ll also not have to wait on a landlord to fix appliances or other problems with the home.
  2. Forced Savings – By paying your mortgage, you are building equity in your home.  After time, the mortgage is paid down and there is a good chance that you’ll be able to either sell it at a profit or use it to leverage other investments.
  3. Income Source – Your home can help make you money.  Renting out a bedroom/basement suite/guest house is a great revenue source.  In crowded cities, offering a parking space or garden for rent can also provide a secondary income.
  4. Tax Benefits – In a primary residence, deducting mortgage interest is the main tax benefit.  Other deductions may be available for specific situations (PMI, energy efficiency, etc).  Consult a tax professional for more information as well as tax benefits for investment properties as they can be extensive.
  5. Stability – No landlord can kick you out.  If you’ve chosen a fixed rate mortgage, your monthly payment should not increase (unless property taxes increase, which is typically a small change).

Disadvantages to Buying

  1. Illiquidity – When buying a home, your money is tied up and cannot be quickly and easily made available.
  2. Repairs – You are responsible for financing all repairs on your home, large and small.
  3. Mobility – It’s much harder to pick up and leave when living in a home.
  4. Value – The value of your home may not increase in the first few years.

I’ve decided to buy, now what?

Congratulations on the decision to purchase a home!  You’ve made the first step, now what?

Home Buying Process

  1. Consult your Realtor.  Don’t have a Realtor?  Email me.  I have an extensive network of excellent Realtors with whom I’d be happy to put you in touch.
  2. Speak with a lender.  Your Realtor may require that you’re pre-approved before going to look at homes.  Why?  Two reasons.  First, falling in love with a beautiful home only to find that it’s unrealistic stinks!  Second, in a strong market, often sellers require buyers be pre-approved.  We don’t want you to miss out on your dream home because you had to wait till Monday to get pre-approved and could not submit an offer.
  3. Start the search!  In looking at homes, the more honest you are in discussing your likes and dislikes, the better your Realtor will be able to meet your needs.
  4. You’ve found the home!
  5. Offer to Purchase.  Your Realtor will discuss your price, terms, and conditions and will submit an offer to purchase.
  6. Negotiations. If your offer is accepted, you skip the negotiations step.  If the seller presents a counter offer, you and your Realtor will discuss the counter and negotiate until an agreement is reached.
  7. Offer accepted!  Or go back to #3, but hopefully not!
  8. Due Diligence period begins.  Your agent will help you coordinate inspections, a survey, obtaining insurance, selecting a closing attorney, and applying for a loan (if not a cash offer).  The lender will order an appraisal, the closing attorney will complete a title search, the loan application will go to underwriting, and be approved or declined.
  9. Negotiate repairs.  Negotiate any repairs that came up during the inspection, survey, or appraisal.
  10. Schedule a closing date
  11. Final Walkthrough
  12. Closing day!  Deed is recorded, possession is transferred, the home is yours!  Congratulations!

This may sound complicated, but a good Realtor with clear communication and expectations can make this a relatively painless process.  After closing, your Realtor can be a wealth of information about anything from a good lawn service to restaurant recommendations to maximizing your renovation budget.  You just need to ask!