A Question of Preference- To Buy or to Rent?

Everyone has their opinion on buying vs renting. So who is right?

Plenty of people love the idea of renting, and yet plenty others are enamored by the thought of owning their home. So who is right? There are lots of factors to consider and your personal living style may help you determine which one fits your life better. What works for your best friend may not work for you, so let’s dive in and look at the key differences in these two forms of ownership.

Renting

When you rent a home, you are paying a property owner to allow you to live in their property. These agreements are usually started with a lease agreement, which will outline the terms of the agreement, such as how long the tenant will live at the property, how much they will pay and how often, if there is a security deposit, and any rules of the apartment or property they are occupying.

Leases are typically for 1 year or 6 months, and are often renewed at the end of their lifetime. If they are not, a lot of times something known as a month-to-month lease will be in effect, meaning there is no longer a long term lease involved, instead the tenant is on a month-to-month basis.

Owning

Let’s run through some of the differences in the two. First of all, buying a property will usually have a larger up-front cost (primarily thanks to down payments and closing costs, but there are ways of lowering these). After that, the cost is fairly similar since both will be paid in monthly increments, whether it be a mortgage or your monthly rent.

The biggest difference in the two is that one you have ownership over, and the other you are paying to occupy a property that someone else has ownership over. So although buying has a larger upfront cost, you can make that money back because when you are ready to move, you have created something called equity in the property that you can collect in cash upon selling.

Equity is the difference in what you owe on the house and what it is worth. Another way of thinking of it is what dollar amount you would walk away with if you sold it right now.

Equity is built in two ways for every homeowner, whether they realize it or not. First, they are paying down their debt on that house every month. Second, their house is usually increasing in value year over year. Let’s look at an example.

Let’s say you bought a $200,000 house, and after a number of years of living there and paying down the mortgage, you now owe $140,000 instead of the initial $200,000. If you sold right then you would keep the difference, or $60,000, right? But that isn’t all.

The home has also appreciated and is now worth $250,000. So you sell that house for $250,000 and pay off the $140,000 loan, and you walk away with your $110,000 in your pocket. That $110,000 is what is know as equity. Equity is the difference in what you owe on the house and what it is worth- or what you would walk away with if you sold it right now. Maybe you use that $110,000 on your next house, maybe you buy a Porsche. The choice is yours. That equity is the biggest advantage that buying will get you.

Other benefits of buying are that it is more stable, you do not have to worry about getting evicted, or rents being raised. Overtime, property values tend to increase as at a rate of about 3.65% a year. This number fluctuates up and down every year, but in the long run, your home should always be worth more than when you originally bought it. Homeowners also enjoy more privacy, with more space between their neighbors and no footsteps from the apartments upstairs.

Renting

When you rent a home, you are paying a property owner to allow you to live in their property. These agreements are usually started with a lease agreement, which will outline the terms of the agreement, such as how long the tenant will live at the property, how much they will pay and how often, if there is a security deposit, and any rules of the apartment or property they are occupying.

Leases are typically for 1 year or 6 months, and are often renewed at the end of their lifetime. If they are not, a lot of times something known as a month-to-month lease will be in effect, meaning there is no longer a long term lease involved, instead the tenant is on a month-to-month basis.

Renting comes with its fair share of advantages too, of course! The biggest advantage of renting would be that it usually has a much smaller upfront cost, and usually doesn’t require the years of credit experience that purchasing a home usually requires.

It is also not as much of a commitment as owning. If you think you may be leaving soon, you can usually work out a lease agreement that will work with your schedule. People who move a lot for work, or are at an unstable period in their life definitely may feel better about renting, as there is far less commitment required.

Another benefit of renting is that there will not be repair costs. Since you do not own the property, you will not be expected to keep the property maintained. If the fridge goes out, it is the landlords issue. If the AC won’t turn on in the middle of the summer, the owner will be the one paying a ridiculous amount to get a contractor out there later that same day.

Some people also say they feel safer renting apartments because they are surrounded by so many others.

Thank you for taking the time to read this blog post. Which one is right for you? Do you value long term growth and ownership or do you prefer the feeling of freedom with less commitment and saving money upfront? It all depends on your lifestyle so only you can answer that question!

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