Buying a house is one of the biggest financial decisions a person can make in their life. Before making a decision that can affect your future, spend some time to think about whether buying a house is better than renting one. The best way to make the right decision is to consider all the factors that affect you and your family. Every individual should look at his or her unique situation and conditions. However, here are some tips to help you identify the advantages and disadvantages of both options and choose the best one for you.
Benefits of buying a house
The biggest benefit to buying a house is that after paying the mortgage you will become the owner of it, and will not have to worry about where you and your family will live.
Another benefit is the increase of property value you own. The increase in value gives you an opportunity to sell the property at a higher price in the future and receive capital gain. Otherwise, when renting the house the increased value remains with the property owner. Moreover, the ladder can bring an increase in the rent over time. However, note that houses do not always go up in value. There are several tax advantages when buying a house. Interest paid on mortgage is tax-deductible, hence decreasing the income tax you pay.
You should consider not only mortgage payments when buying a house, but also property taxes, insurance payments, and maintenance expenses. In a rent situation, these are fully financed by the owner. As Robert Kiyosaki outlines in his bestseller “Rich Dad, Poor Dad”, buying a house can be a liability, as it requires continuous investment.
Advantages of Renting
The initial investment to rent a house is much lower than buying one. Sometimes you have to make advance payments for the first month, but this is nothing compared to the investment on a home purchase. As mentioned before, the renter of a house also has limited responsibility when it comes to repair and maintenance. When renting a house you also have the flexibility of relocating if necessary without being tied down to a property investment.
Several possible conflicts can arise between the owner of the property and lessee that cannot be easily solved, so be sure you read your lease thoroughly and have a good relationship with your landlord. Remember that you cannot renovate a home as you wish without the agreement of the landlord.
Here is a sample for financial comparison:
|House Value||$ 300,000||Monthly rent||$ (1,000)|
|Mortgage 30y, 6%||$ 300,000||Rent increase||3% annually|
|Annual Maintenance||$ (1,500)||Monthly Savings 3%||500$ (1500-1000)|
|Increase of House value||2% annually|
|Monthly mortgage repayment||$ (1,500)|
|Let’s assume after 10 years of owning a house, you decide to sell it:|
|Sell price||$ 370,000||Savings||$ 130,000|
|Remaining Mortgage||$ 260,000|
|Net Amount received||$ 110,000|
In this particular case renting a house is more beneficial than buying one. After ten years of repaying the mortgage when we decide to sell, the house values 370k, 260k from which we use to pay the remaining mortgage amount (260k), and net the remaining 110k. On the other hand, by renting the house for these ten years we would have been banking savings of roughly 130k as opposed to 110k. However, if the annual percentage increase of house value figured 3% instead of 2%, we would have a different picture entirely. In such a case, the net amount remaining after repaying mortgage would figure out to 140k, which is better than the $130k savings with 2% house value increase.
Before choosing to buy or rent a house, you should very carefully calculate what your savings/earnings will be down the road. Consider all the advantages and disadvantages of buying or renting before making a final decision. Whether you will regret buying or renting a home depends entirely on YOU.