Home Buying Decisions: Comparing Home Ownership to Renting
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.
Psychologically, many folks equate buying a home with settling down. After all, you'll be coming home to your home day after day, year after year. Of course, you can always move, but doing so can be costly and time consuming, and as a homeowner, you'll have a financial obligation to deal with.
Weighing Financial Considerations
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 and property taxes), at least in the U.S. are generally tax-deductible. However, these tax 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:
Considering Your Time Frame
You will face significant costs when buying and selling a home. My analysis suggests that you will probably need at least three to five years of low appreciation to recoup your transaction (and maintenance) costs. Some of the expenses you face when buying and selling a home include the following:
Some people invest in real estate even when they don't expect to live in the home for long, and they may consider turning their home into a rental if they move within a few years. Doing so can work well financially in the long haul, but don't underestimate the responsibilities that come with rental property.
Deciding When to Buy
If you're considering buying a home, you may be concerned whether home prices are poised to rise or fall. No one wants to purchase a home that then plummets in value. And who wouldn't like to buy just before prices zoom higher?
It's not easy to predict what's going to happen with real estate prices in a particular town or neighborhood over the next few years. Ultimately, the economic health and vitality of an area drive the demand and prices for homes in that area. An increase in jobs, particularly ones that pay well, increases the demand for housing. And when demand goes up, so do prices.
If you buy your first home when you're before the age of 40, you will likely be a homeowner for many decades. Over such a long time, you will surely experience numerous ups and downs. But you'll probably see more ups than downs, so don't be too concerned about trying to predict what's going to happen to the real estate market in the near term and whether prices may fall a little. Of course, you should do a basic rent versus buy comparison to see if the properties you're considering offer a decent value or not. A silver lining to the late 2000s decline in home prices is that homes are more affordable than they have been in a long time and offer good value versus renting in many areas.
That said, you may be, at particular times in your life, ambivalent about buying a home. Perhaps you're not sure whether you'll stay put for five years. Therefore, part of your home-buying decision may hinge on whether current home prices versus the cost of renting in your local area offer you a good value. The state of the job market, the number of home listings for sale, and the level of real estate prices as compared to rent are useful indicators of the housing market's health.
Trying to time your purchase has more importance if you think you may move within a few years. In that case, avoid buying in a market where home prices are relatively high compared to rental costs. If you expect to move so soon, renting generally makes sense because of the high transaction costs of buying and selling real estate.
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