Homeownership has been a part of the “American Dream” for decades now.
You’re likely to have heard that buying a house is a great investment and that you don’t want to ‘flush rent payments down the drain.’
However, in your financial journey, you are more likely to start off as a renter. As your savings grows, there comes a point where homeownership is suddenly more achievable. When does it make more sense to rent versus buying real estate?
Here are six situations that make renting the more ideal choice versus purchasing a home.
Time Horizon in Your Place
How long are you planning to live in this house/apartment?
There are many costs associated with buying/owning/selling homes, and can be quite significant.
These additional costs are part of investing most types of real estate, and to help offset these high costs you need to stay there for a while. Many experts believe that 5 years is generally the tipping point. Usually, it isn’t until you’re about five years into paying down your mortgage that you’ve made enough progress on the principal of your loan to make purchasing a home a better deal than paying rent each month. If you plan to live there for less than 5 years, renting probably makes more sense.
Geographic Flexibility Needed for Career
Renting allows you to have more flexibility and makes it possible to move without major obstacles or a significant financial loss associated with quickly trying to sell a home.
If you’re at that point in your career where taking a job with another company or moving to another city might be helpful to your career, perhaps it makes sense to rent to keep that flexibility if needed.
New to the Area?
Moving to a new area can be very stressful and hard to know very much about the different neighborhoods and communities. If you’re buying a property you’re making a long-term decision around the area of town, which normally comes with spending more time in that location.
Renting when you first move to a new city and giving yourself time to decide the ideal neighborhood and get a better lay of the land will help immensely. Perhaps after a while renting, you’ll know the places that you like to go and what you’d like to be near, allowing you to make a more informed buying decision.
Owning a home is a lot of responsibilities. Renters get the benefits of not having to worry about home maintenance and landscaping. As a renter you don’t have to worry about the additional costs of replacing that worn out roof, repairing water damage or any other very expensive home repairs.
As a homeowner there is no landlord or superintendent that you can call to take care of these issues for you. These costs are typically out of your pocket.
You Have Credit Issues
To purchase a home, you’ll likely need to be approved for a mortgage.
Credit issues, such as a low score or limited credit history, can give you trouble in getting approved for the loan.
If you are approved for a loan, a low credit score will result in a higher interest rate on your mortgage and a much higher cost of the term of the loan. Over a 30 year loan, this can result in almost $90K in additional interest paid from the highest FICO score to lowest.
Spending some time renting and working to improve your credit score might make sense and save you a LOT of money over the long run. Once your credit score has improved, perhaps then it makes sense to start thinking about buying – especially if your interest rate is much lower.
You Don’t Have the Money for a Down Payment
Putting down less than 20% toward your home purchase will add mortgage insurance on top of your mortgage payment. This added cost can add up to a significant amount each month, and certainly adds up over a long period of time.
Purchasing a home is a significant financial investment. If purchasing a home is part of your financial plan to add real estate exposure to your portfolio, there are alternative methods of investing in real estate without purchasing a home.
However, if you’re deciding between buying and renting, you should be sure that you’re considering the specific details of your own life and preferences to see which option makes the most sense for you. Sometimes renting makes more sense.