With the U.S. housing market still reeling from the recession, many would-be homeowners are asking themselves if they should rent instead of buy. What factors should you consider before making your decision?
Start with how long you plan to live in your home. Most real estate professionals and financial advisors agree that home buyers should plan on at least five years. Otherwise, when you add up the transaction costs, property taxes, maintenance costs and your mortgage payments, it makes more financial sense to rent.
An often-used rule of thumb to calculate a buy-rent ratio is to divide the purchase price of a home by the annual rent of a similar property. Generally, if the number is above 15, you might want to consider renting because it will cost you less over a period of time. If the number is below 15, then home ownership may be more attractive.
A recent New York Times article talks about some of the differences between buying and renting and even includes a calculator to help you decide which is right for you.
Of course, if you do lean toward buying, take a look at your income to make certain you're not buying a home beyond your means. Even if you can come up with the down payment, be sure your mortgage payment won't leave you "cash-strapped" and unable to afford anything else. As you plan, keep in mind your emergency fund. As a home-owner, you are responsible for all home repairs. As a renter, your landlord may incur those costs. An unplanned home repair can quickly deplete a three month emergency fund.
Another consideration is the security of your income. If you lose your income, it may be easier to find a less expensive place to rent than it would be to sell a home.
For some, there are benefits to investing in the market instead of buying a home. A recent Wall Street Journal article gives an example of the dramatic difference a disciplined investor would have experienced if he would have invested in the stock market in 1980 instead of buying a home:
In 1980 an investor considered buying a $99,550 home that by 2010 would have increased in value by an average of 3.6 percent per year to $296,820. If that investor would have put his 20 percent down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years into the Dow Jones Industrial Index instead, his portfolio in 2010 could have been valued at $1,800,016. To put it plainly, the stocks would have been worth more than the house by $1,503,196.
Of course, like owning a home, investing involves risk and both could drop in value. While there are a number of factors to consider when it comes to buying vs. renting in the end it's up to you to assess your personal situation and the factors that influence this type of decision before you make a move.