Buy, or Rent?

Should you rent or buy a home? That is a question people all over the free world ask themselves every day.

There are numerous factors to consider on whether your temperament is suitable for home ownership, or continuing to rent. Deciding whether to rent or buy a home is as much an emotional decision as a financial one. Let the financial aspect rule the final decision, but do not ignore your heart!

Are you ready to settle down and make roots in a specific location? If so, then plan your financial strategy, factoring in all of the expenses of home ownership, and make the investment. If not, rent at an affordable level, at a price less than the cost of ownership, and sock away the cash for a down payment if/when you are ready to buy.

Home ownership is a long-term investment and creates a sense of permanence. It can also become an anchor in the community that you cannot easily shed. Real estate is an illiquid asset and not easily ‘cashed out,’ and cannot be picked up and moved with you if you take a job that requires relocation. You can’t use it for food or medication, if you have a medical emergency that cuts off your income. If the neighborhood suddenly changes, you cannot pick up and move without consequence.

What type of home should you buy?

You have decided it is time to buy a home, but that does not necessarily mean a house. Condominiums might be the right answer for you, once you have considered the next question. Or perhaps the answer to the next question is an enthusiastic YES, and you should consider buying a duplex or four flat building in which you can live, and receive all of the same favorable financing and tax consequences as a single family home.

Are you ready to tackle all of the small maintenance and repairs yourself? Have you factored in the costs of the tools you will need and those repairs into your financial decision-making process?

With ownership comes certain responsibilities beyond financial ones. Owning a home may require a certain set of maintenance skills, or the finances to hire skilled craftsman and tradesman to handle maintenance issues. Do you have these skills, or, are you willing to acquire them? There is a reason a plumber makes $75 to $100 an hour – their tools and skills have been acquired through training, experience and investment, no less extensive or exhaustive as getting that MBA.

Are the tax benefits of ownership all they are cracked up to be? The answer is “sometimes.”

Sometimes the tax expenses of owning a house will exceed the tax benefits in a very short time. Discuss the income tax benefits of owning a home with a qualified tax professional prior to purchasing, and compare that projected benefit to the projected costs of local property taxes. Once you have projected the property tax increases against the income tax savings, determine if the convergence of the benefits are being exceeded by the expense in the near-term. If this convergence occurs too closely in the future, then consider remaining a renter and investing the cash in a different long-term vehicle such as municipal bonds that also receive highly favorable tax consequences, as well as being a much more liquid asset in the case of an emergency.

Is the timing right?

Real estate values are a localized phenomenon, even though they are somewhat impacted by national factors such as mortgage rates. You need to find out if the values in your location are rising, if they are flat, or have they been declining?

If home values are in the decline, then now is not the right time to buy. Be patient, and wait a few months. Now is the time to watch the neighborhood you want to live in for a crop of FOR SALE signs sitting on lawns month after month. Once those signs start saying SOLD, it is time to buy. Your odds will be significantly improved that the asking prices are more reasonable than they once were, and you should be able to afford to purchase more home than you originally thought.