I began think about whether to rent or buy when I started a property management company back in 2007 to compliment the sales services that our realtors already offered. Typically leasing companies and sales companies are fighting it out. Sales professionals say "stop throwing your money away on rent" while leasing agents are pushing hard to retain and increase their tenants
Having both companies has been a real eye opener. I am happy that I don’t need to be a cheerleader for just rental or just sales. By working with both renters and buyers I have come to realize that for some renting is the best option while other can make a great financial decision by purchasing a home.
When I am working with a client the first questions I ask is "How long do you plan to stay in this home?" I recommend that if you are going to make a purchase plan to stay a minimum of 2 years. There are closing costs associated with a purchase and if you were to buy and sell too quickly the home may not go up in value enough to cover those costs.
Another question that I ask is "How well do you know the area?" Renting is a great way to feel out a new location with no strings attached and put yourself in a great position to make an educated purchase at the end of your lease. There are many rental terms available, although 12 months is fairly standard it is possible to take advantage of shorter leasing terms or lease with option to purchase if you want to feel out the area.
Is Renting a Waste of Money?
Under the right circumstances renting is absolutely not a waste of money. I hear people say, "Well you are just throwing you money down the drain"- not at all. You have to live somewhere and that costs money. It is true you are not building equity when you rent and there is not tax incentive; however, if you need time to learn the area, save for a down payment or don’t have long term plans to live in that location renting may be exactly what your should do.
Is Renting Cheaper than Buying?
Typically the monthly payment for a rental is slightly less than your monthly costs associated with owning a home. When you purchase a home you are paying principle, interest, taxes, and insurance. In addition you would also factor in expected maintenance cost or home owners association dues if you are buying a condo or townhome where much of the maintenance is included.
What about Maintenance Costs?
When you rent the majority of the repairs on the property will be addressed by the property owner or the property manager. In the case of large scale apartment complexes they will likely have staff on hand to assist with even small routine maintenance like changing air filters and light bulbs. When renting from a home owner typically you will be responsible for routine maintenance and the landlord will be responsible for repairs that may be necessary like a water heater going bad or a roof leak. The cost of these services will typically be built into the rent just like an insurance policy.
Are Tax Incentives a Reason to Buy?
For some this is a key motivator. When you rent none of your monthly payments go to deductions; however when you purchase a home both your interest payments and your real estate taxes are deductable. These payments can significantly reduce the homeowners’ tax liability each year. At the end of the year a homeowner receives a 1098 from the lender showing what they have paid in interest. For many this mortgage interest deduction alone could be a huge savings.
In addition there is a capital gain exclusion for the sale of a principle residence. When you sell you sell your home you can receive your profit back tax free. This is a great way to build up your net worth.