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Making the Rent or Buy Decision

- Monday, February 04, 2013

Question: What issues should I consider in deciding whether to continue renting versus buying a home?

Answer: As financial decisions go, the decision regarding if and when to buy a home is pretty challenging. You've got plenty of financial considerations to contend with, as well as personal issues.

You probably have already heard some arguments regarding the supposed financial benefits to owning a home. These include the notion of buying and owning a home for the tax breaks as well as the thinking that paying rent is analogous to throwing or flushing your money away.

The biggest homeownership costs (mortgage interest, property taxes) generally are tax-deductible. However, these breaks are already largely factored into the higher cost of owning a home. So you should never buy a home just because of the tax breaks.

Renting isn't necessarily like throwing your money away. In fact, renting can have a number of benefits, including:

Renting sometimes costs less (sometimes much less) than buying even after factoring in the tax benefits of owning).

You may be able to save more toward your personal and financial goals if you can rent. You can invest what would have been a down payment in other financial assets.

Renting has potential psychological rewards. You usually have more flexibility to move on as a renter. As a homeowner, you have a major monthly payment to take care of. To some people, this responsibility feels like a financial ball and chain.

As a homeowner, your largest monthly expense (the mortgage payment) doesn't increase,  however, your property taxes, homeowners insurance, and maintenance expenses are exposed to inflation.

You will face significant costs when buying and selling a home. You will probably need at least five years of low appreciation to recoup your transaction costs. On top of the transaction costs of buying and then selling a home, you'll also face maintenance during your years of home ownership.
 
To cover all the transaction and maintenance costs of homeownership, the value of your home needs to appreciate about 15% through the years that you own it for you to be as well off financially as if you had continued renting. Counting on that kind of appreciation if you need or want to move elsewhere in a few years is risky.

For more information on renting a townhouse in Lynchburg, VA, contact Old Mill Living.

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