When I first started looking into personal finance, figuring out what was best for me, there was never a point where I could actually consider buying a house. I was single, I had a very modest income, and I was barely making it by as is. There was no chance I could afford to own property. A few years later, after paying off some debt and being able to purchase a vehicle outright, the possibility of owning some property has started to look a lot more possible. While I’m not yet there, I’ve begun to invest some time in figuring out which would be better for me, renting or buying a house.
Each have their own benefits. Renting allows you to have a very fixed budget every month. Even if emergencies happen and things break, that’s the responsibility of the landlord, not the tenant. Therefore, you can just keep on paying your same monthly amount. However, you are subject the whims of the owner, including getting evicted, having annual rent raises, and are limited as to what you can do on someone else’s property. Owning your own place, on the other hand, allows you not only to change or modify whatever you would like, but you are also starting to pay yourself back. When you pay your monthly mortgage, you are investing money into something that will actually have a return when you eventually leave that house, an obvious benefit over renting.
What costs more, renting or buying?
Sometimes the decision simply comes down to price. Can you afford to purchase property in your area? What would the price difference be between a rented house and a purchased house. Where I used to live, in North Vancouver, there was no comparison. While prices have recently dropped, good luck finding anything for less than half a million dollars – and that includes most townhouses and apartments. In comparison, you could find small places to rent for less than $1000 a month, far less than the mortgage on the property would be worth. We’ve since moved to Vancouver Island, and while the Victoria housing market is also quite expensive, further up island the prices are far more reasonable. You can rent a house for less than a thousand dollars, again, but you can also purchase a house in the 200,000 range. So if you figure out the monthly payments on that particular mortgage, it may be very similar in price to renting. At that point, there is hardly any financial reason to rent, when you can own for the same price.
Don’t forget, however, that even if your mortgage is the same price, you’ll also have to pay fore house expenses like property taxes, utilities, and be responsible for any maintenance or repairs that are required on the home. Property ownership brings its benefits, but also brings its risks.
Can you afford a house?
So the second big thing you need to look into before purchasing a home is your own financial situation. You don’t ever want to have to stretch your financial budget just to purchase a house. It’s not worth the financial strain. It’s better off to keep renting while you save up some more money. Even if the budget is close, or tight, but doable, then you may want to make sure that you have a hefty emergency fund saved up. When you start to own houses and property, you’ll want to increase the size of your emergency fund, as all of a sudden your emergencies can become so much larger. Wind storm knocked half your roof off? Better hope your emergency fund is able to cover that, else the home that you wanted to retire in may be going back to the bank. When you agree to take on a mortgage of that size, be sure that you can afford both the loan and the risks associated with it.
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Alan Schram writes about personal finance and his encounters with it in his everyday life. Alan is recently married and is looking to save money on expenses and reduce his debts.
Renting versus buying is a very personal decision. I have done both. For several years while in school and uncertain about where we might settle, we rented. The ability to move quickly is a big plus although at the end of the lease, you have nothing to show for the money spent. On the other hand, now that we are in a location and plan on being here for a while, we have purchased. The mortgage is a form of forced savings as the equity is increasing every month. Of course it would be nice to be mortgage free, but it will happen someday.
I went very deeply into this topic recently:
http://www.moneyinfant.com/buying-vs-renting-a-home/
The short answer is that over time buying makes more sense. However, a persons lifestyle also plays a part in this decision. Sometimes the right answer isn’t dictated by finances. I’ve been a renter for the past 12 years and plan on continuing to rent, not because it is better financially, but because I like the flexibility afforded by renting.
I’ll only ever be an advocate of buying, because I’ve had major issues with renting. To me, even if buying is expensive, it pays off in lack of disrespectful, noisy neighbors!
To buy or not to buy, that is the question.
If you are young and do not have kids yet, it is a good idea to rent because this gives you more flexibility to move to a good school area later on when you have kids. Some people purchase a house for investment as a rental to get some passive income and rent a cheaper place for themselves to live in. Pay attendion to what is considered to be your principle resident though. The idea here is that you can purchase an investment house somewhere you can get good return. This area is not necessary the area you want to live in.
My thoughts are that buying is good if you plan to live there for 6 to 10 years and if you are able to buy when housing prices are low in your area. For example, if you buy when prices are high like they were in Western Canada in 2006, and try to sell a few years later when prices have dropped considerably, you lost money. Plus if you use a Realtor than you have to pay their commission which means you lose even more money.
Buying a house use to be a very good investment in your future but these days the housing market is too volatile to make it worthwhile. There are plenty of other ways to invest your money.
Rent vs. buy is such a personal decision. I’ve been a home owner but I’m renting now and so happy to be renting!
@ Daisy: have you ever bought and found out you had the neighbours from hell? I have and it’s very stressful! Bad neighbours can be anywhere and if you’ve bought next to them or they buy into the neighbourhood after you’re already there, it’s a lot harder to deal with them because they can’t be evicted and local bylaws are generally toothless.
I added up all the incremental costs to staying in our house (property taxes, maintenance at 3% of value of home = $500/month and yes, that is true!, higher insurance than a tenant’s policy, higher utilities). It all came to $1,000 a month and that is with no mortgage, so even a paid-for home can be quite costly to live in.
Houses, statistically, increase in value at approx 5% per year (and yes, that’s also congruent with my personal experience here on Vancouver Island). For the hassles of home ownership, there are a lot easier ways to make 5% on my money.
Home owners very easily get caught up in “reno creep” where one reno leads to another. ie, “gee honey, the new paint makes the old carpet look terrible, guess we need to get new carpet”
It is naive to consider home ownership just on the dollars out to rent vs. mortgage. There is way more to it than that. Unfortunately, first time home buyers really have no frame of reference for that.