Renting vs Buying a house: What’s the best option?

Renting vs. Owning: An Overview

When broaching this subject, most people that you speak to will usually tout buying real estate as the best way to invest money, since the value of the property typically rises over time due to inflation and personal investment in the property, citing deductions in taxes while asserting that the money you spend in rent doesn’t come back to benefit you in any way.
However, when it comes to making a decision on buying rather than renting property, it’s hardly as simple as that – there are many more factors that need to be taken into consideration than just your personal financial situation. The reality is that for some aspects, renting may in fact be more compelling than buying, depending on the personal, professional and financial situations of each person.

Should you buy or rent a home?

When trying to decide between buying and renting property, there are a number of different factors to consider before coming to a decision. Before you really begin to ask yourself whether you should buy or rent a house, you should make sure that personally and professionally, you are able to start planning the next five to ten years of your life. Once you know you are professionally stable and you’ve found an area that you would like to live in, you should verify that your financial position permits you to assume the upfront costs of homeownership.
Things to consider before buying a home
One of the reasons people always give for buying property rather than renting is that money paid in rent doesn’t “work” to contribute to the overall value of your assets, so the money that you pay in rent is money that you’ll never see again. However, what most people may not realize is that the true cost of homeownership is higher than what they may be anticipating.

While it’s true that in paying off a mortgage you are also contributing to the overall value of your assets, since the value of the property you are paying off will rise over time due to inflation, there are a lot of costs associated with buying a house that don’t contribute to building the equity value of the property. Thus, you will never see the money that you pay to cover these costs resurface further on. Some of these costs are incurred during the first years of homeownership, and can contribute to a prospective homeowner’s hesitancy to enter the housing market. But, despite this, investing in real estate provides long term personal and financial benefits.

Buying a house: what are the pros and cons?

What are the benefits of buying a home vs renting? While buying property may present some obstacles in the short term that can be cause for hesitation, in the long term, owning property can provide benefits for homeowners that renting cannot.

Buying property is a means of investing for the future in which the capital gains that you make from the investment are safeguarded against the corrosive effects of inflation on the value of your assets. This is because the value of physical assets like real estate tend to increase in value over time with inflation.

Buying property and continuing to invest in it over the years also increases its value over time. When you own the property, you have greater freedom to make design modifications and decorate, which will usually contribute to the value of the property.

A short-term advantage to owning a home that many find more appealing than renting are the low monthly mortgage payments. Compared to the amount paid in rent each month, the cost of mortgage payments are typically much lower, since mortgages are spread over many years. In addition, in many countries mortgage interest rates are increasingly low for buyers, making it a great moment to get into the housing market.

Of course, buying a house is not without its drawbacks. Some of the disadvantages of buying a home are the additional costs associated with buying a property and maintenance. Interest rates on mortgages can go up, causing you to pay more on your mortgage. These costs can be very stressful and place strain on your financial situation.

Finally, while purchasing property is an investment for the future, it differs from other investments in that, once you decide to purchase a property, your funds are no longer liquid. This means that it can be more difficult and time-consuming to sell the property and see a return on your investment.

Things to consider before renting a home

Something to keep in mind when deciding between buying a house vs renting an apartment is the amount of time you plan to live in the house. It is a common rule of thumb not to buy a house if you know that you will be living on the property for less than 5 years. This is because there is a greater risk that the equity value of the house will not have increased in the first years, at least not enough to offset the costs accrued from buying the property (things like interest fees on the mortgage are higher during the first years of homeownership, but don’t contribute to the equity value of the property).

Renting a house: what are the advantages and disadvantages?

What are the advantages of renting a house vs buying? While buying a property does provide many benefits over the long term, renting property allows for more flexibility and is better for accommodating needs in the short term. Finding a property to rent and coming to an agreement on a housing contract is generally faster than buying, and the financial risk associated with renting is significantly less than that of buying.

In some cases, property for rent may come pre-furnished, and the housing contracts also provide for maintenance and repair of the property while you are renting. This helps to keep the upfront costs of renting an apartment much lower compared to buying. You may also find that renting allows you to live in more desirable areas where listing prices for purchasing property are otherwise inaccessible.

In addition, when it comes to the financial checks associated with buying and renting, it’s easier to pass those for renting, and the initial deposit to be made when renting is not as significant.

However, in renting property, the rent payments you make contribute to paying off the owner’s mortgage, rather than your own. In addition, your rent payments may not remain stable over time – once your contract is up for renewal, you may also find that the price of rent has increased. Finally, you have less flexibility when it comes to decorating and making changes to the property, which can make it more difficult to lay down roots and truly feel “at home” in the space.

Which is the cheaper option?

In the short term, in terms of the cost of buying a house vs renting, the upfront costs and down payments related to buying property make renting a property the cheaper, more accessible option. In the long term, to understand which option makes more sense financially, you need to get a sense of the amount of time you plan to live in the property and how much of the mortgage you are able to pay off in that time, as well as how much you would need to pay in once-off costs (origination fees, realtor fees) and annual costs associated with homeownership (mortgage interest, property taxes, homeowner’s insurance, etc.) that don’t contribute to the equity value of the house, not to mention any investment opportunity costs that stem from having money tied up in payments you wouldn’t have if renting. Understand from this the equity value of the property minus the costs. Compare this to the value of your assets over the same time after accounting for the costs that would be incurred from renting during that same time.

How do you decide whether to rent or buy?

In deciding when to buy a house vs rent, you should carefully consider the pros and cons of renting vs buying a house, especially the factors mentioned above, while taking stock of where you are financially, as well as personally. Are you ready to settle down and have you found a place where you would like to live for at least the next 5 to 10 years? Are you financially stable enough to apply for a mortgage and make an offer on a property? Once you know the answer to both of these questions, you will know which option makes the most sense for you.

FAQ

How do I know if I am financially ready to buy?

As a general rule of thumb, once you are in the position financially to be able to pay forward at least 20% of the property’s purchase price, you can take out a mortgage and buy the property.

Which is cheaper, buying or selling?

In the short term, the upfront costs associated with buying make renting a property the cheaper option. In the long term, however, this may not be the case, as the costs of rental contracts continue to rise.

What are the disadvantages of buying a property?

Some of the main disadvantages of buying property are the additional “hidden” costs that most people do not consider when deciding to buy, such as association fees or property maintenance.