Rent vs Buying: Pros, Cons, and Equity

This is a series of blog posts specifically aimed at young adults or other first time home buyers. Last week I looked at renting and buying from a financial viewpoint and I shared a rent vs. buy calculator that is extremely helpful. There are many factors when deciding to rent or buy, and often times it comes down to your plans and priorities.  Here are a few ways to view the rent vs buy question:

 

  Renters Home owners
Improvements Normally can’t make improvements to the rental. Can upgrade and customize their home however they want (and some improvements will add to the value of the home)
Flexibility Are not tied down. Normally sign a 1 year lease and can move after that. This is often good for young adults who are still establishing their career plans. Typically must own a home for at least 4-5 years before they sell in order for the appreciation to offset the cost of buying/selling.
Stability Never know what the rent will increase to year over year. Always know exactly what the mortgage payment will be every single month. And they can pay extra if they want to pay down the loan faster.

Equity: Now, when I ask people why they want to buy a home, they almost always include “to build equity” or “to make a long term investment.” What does this mean?

The principle of home equity essentially means each payment increases your ownership (equity) in the home, thus resulting in you making more money when you sell. Here is an example…

Let’s say you buy a house for $100,000 with a 5% down payment. You now owe $95,000, and you have $5,000 equity in the home. After 10 years you pay down the mortgage to $75,000. So if you sold at $100,000, you would pay off the mortgage of $75,000, pay $8,200 in fees and commissions to sell, and you’d be left with $16,800!

But wait, there’s more! Assuming you took good care of the home, it’s appreciated in value to $135,000. You have $60,000 of equity in the home. So after 10 years you could sell for $135,000, pay off the $75,000 mortgage, pay $11,000 in fees and commissions to sell, and you’d get a check for  $49,000! (135,000-75,000-11,000=49,000).
*These are estimates and are situational*

In summary, after renting for 10 years you walk away with nothing. But after owning a home for 10 years you could walk away with $49,000! 

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