Today we’re tackling one of the most important questions. Is it better to rent or buy? Everyone should know how to answer this, and it’s especially critical for millennials as they advance in life. This post is in a series of articles I’m writing specifically aimed at young adults or other first time home buyers.
Misconceptions and myths run wild when it comes to renting versus buying a home. It is vital that each person answer this question for themselves, because everyone’s situation is different. Having different jobs in different housing markets at different times will result in different answers to the same question. We’ll start with the tangible financial aspects, and next week get into other pros and cons. I’ll assume that you’re already renting or have researched rent costs. Here are a few pointers to get you started:
- Talk to a mortgage lender or use a mortgage calculator to see what an estimated monthly payment on a home would be (make sure it includes property taxes and home owners insurance).
- Compare apples to apples. For example, if you rent a 2 bedroom apartment with a dated kitchen, don’t start by comparing your rent to mortgage payments on a 4 bedroom home with granite counters and stainless steel appliances. Also, remember to factor in utilities and property taxes. Do some research or ask me how much property taxes are in a given area.
- Know that there are tax benefits of owning a home. There are many write offs and deductions that encourage home ownership. Watch this video to learn more (it’s not professional video quality, but he explains it pretty well!)
- Unfortunately, life happens. The furnace will break. The roof will need to be re-done. And those pesky squirrels will keep breaking into the attic. Renters normally have this taken care of for them, but a homeowner needs to pay up! Plan for these repairs accordingly (How Much Should You Budget for Home Maintenance and Repairs).
Here is the best resource I can give you: Go to this New York Times website that encompasses each of these tips. I recently discovered this site and it is very helpful. This is essentially a rent vs buy calculator and you can get an estimated overview of the rent vs buy discussion that’s tailored to your scenario!
Now let’s pick some round numbers and run the data through the rent vs buy calculator:
If I could buy a house for $100,000, planned on living there for 5 years, paid a 5% down payment, knew that the cost to sell my home would be around 8%, and expected $1,500/year for maintenance and $1000/year for homeowners insurance, then renting is better if I can rent for under $598 a month. In most cases around West Michigan, rent is significantly higher than this, indicating that buying a home with these conditions is often the better long term choice!
Be sure to read my next article about additional pros and cons of renting vs buying! Have questions? Don’t hesitate to give me a call!
Do you want Dave Ramsey’s bold opinion? Watch here.