Rent or Buy?
Rent or Buy? That is a question ask by thousands of individuals each and everyday.
Every individual's situation is different - financial situation, family situation, job situation, etc. But in the long run, buying a home will always work out best for 1 single reason - equity. Each month that rent is paid, that amount of monthly rent is gone forever - you will never get it back. But when you are buying a home and paying a monthly mortgage, you are building equity.
Equity is the amount of the home that is own outright. When renting, you never own any portion of the property outright. Equity in a home is the current market value of the home minus the current mortgage balance. If you have a home that is currently worth $200,000 that you have paid the mortgage balance down to $125,000 than the equity in the home is $75,000. If you decided to move and sell the home, than you receive the amount of equity that has been accumulated - $75,000 (that is not considering expenses incurred in the selling process). If you are renting for the same period of time and decided to move, you get nothing back.
Some things to consider when you are making your "rent or buy" decision.
If you are planning on living in the same city for more than 4 or 5 years, you should consider buying. In the long run, buying will always outweight renting. You will never get your monthly rental payments back, but when you sell your home you will get some of your money back depending on how much equity you have obtain.
2. Job and Financial Stability
Buying a home is a long term commitment. If you are not sure of your job and financial stability, than renting is probably a better option until your future outlook becomes more certain. But if your financial and job outlook for the future is stable, you should strongly consider buying.
If you are currently paying a substantial amount of money for rent per month than you should consider buying. But the total amount you pay for housing related expenses (mortgage that includes taxes and insurance) should not exceed a third of your income.
4. Price-to-Rent Ratio
The price-to-rent ratio is the price of the home divided by the yearly rental cost. There is an easy to use online calculator by The New York Times that you can use here. It shows how much you will save or lose on renting vs buying over a certain amount of time. There is another Bankrate buying vs renting calculator that you can use here.
Research not only your own situation but the real estate market in the city in which you plan to rent or buy. Is it a buyers market? Is it a sellers market? Are home values still on the decline? Is the rental market experiencing a boom? Is there an abundance of rental properties available? Is the occupancy rate in the area high or low? Either way, renting or buying, know the situation before you act.
Additional Information and helpful links
Rent or Buy video by Bankrate
The Ultimate Buying vs Renting Resource List by First Choice Loans