5 Key Questions to Ask Before You Decide. Should I rent or buy? Not everyone has been so keen to buy with the housing prices soaring. Many are more inclined to wait for the market to cool before considering buying a home, selecting to rent in the meantime. Others still consider home ownership off the table, preferring to rent.
After all, renting gets a bad rap. Beyond the financial implications, choosing to rent over buying a home offers a completely different lifestyle, equipped with a distinct set of pros and cons that make it an attractive option despite home ownership’s inherent perks.
Are you trying to decide if renting or buying a home is right for you? Start by asking yourself these five key questions to determine which path might work best for you.
1. How much can you afford upfront?
Purchasing a home requires a substantial amount of cash on hand. The exact number will vary based on the purchase price, but a buyer should expect to pay the following:
Earnest money – This cost is often 1% of the purchase price and collected in advance of the down payment.
Down payment – The exact percentage will vary, but an FHA loan requires 3% down payment at minimum and anything less than 20% will add on PMI charges.
Closing costs – These costs are due at closing, and are usually between 2% and 5% of the purchase price.
Prepaid property taxes and home insurance – The specifics may vary, but expect to pay between 6 and 12 months of property taxes and home insurance at closing.
The higher you purchase the property for, the higher the above costs will be. This is especially true if you commit to making a 20% down payment to avoid PMI. A buyer can expect to pay a few thousand minimum upfront with a ceiling that stretches well over $100,000 and higher.
Signing a lease for a rental property or apartment, on the other hand, requires some or all of the following:
First month’s rent
Last month’s rent
Security deposit
Broker fee, if applicable
Even if a tenant is required to pay all of the above, the combined cost is typically significantly lower than the costs associated with purchasing a home. For this reason, the amount of cash you have on hand will play a significant role in whether you can or should rent or buy.
2. How much can you afford in monthly costs?
The specifics will vary, and it is not impossible to find a lavish apartment that costs significantly more in monthly costs than a modest home. Typically, however, you’ll pocket more cash at the end of the month by renting.
Home ownership requires paying your mortgage, which should include principal, interest, insurance, and taxes. In addition, homeowners have no landlord, so they’re also on the hook for utilities including electricity, water, and gas and/or oil depending on your area.
For renters, it all depends on the terms of the lease. Rent is a given, but it is sometimes the only monthly cost a tenant is required to pay. Most landlords cover maintenance and upkeep of the unit and/or property, some landlords cover utilities, and some do not require renters insurance, although it’s typically good to get some anyway.
Compared to homeowners, renters typically owe less each month.
3. Should I Rent or Buy – How long do you plan to stay?
Some folks are looking to lay down roots in a nice neighborhood, settle in, have a few kids, and build a life. Others are always chasing opportunity, jet setting, vacationing, or otherwise going wherever the wind takes them.
No lifestyle is superior to the other. It’s all a matter of personal taste.
If you’ve been looking to set up shop in a great town and you have the cash to make it happen, home ownership is the best option because you will earn equity in your property over time, providing a valuable asset later in life.
If instead you’re interested in going with the flow and picking up to move across the country at a moment’s notice, buying a home will be more of a burden. Renters get a great deal more flexibility when it comes to making sudden changes to their lifestyles.
4. Should I Rent or Buy – What are my financial priorities right now?
Purchasing a home understandably puts a strain on other financial goals. For example, if you had grown accustomed to depositing a respectable percentage of your paycheck into a 401(k) for retirement, you may have to adjust that percentage depending on how much more money you’re going to be on the hook for each month.
Paying down student loans or high interest debt like credit card bills could clash with your goal of home ownership as well. Even if your income and cash on hand qualify you for a good loan and you’re approved to buy, you may find yourself underwater before long if you have too many balls in the air.
If you’re prioritizing other goals like paying down debt or saving for an emergency fund, it may be worth it to ride things out and rent for a little while instead of buying and hoping for the best.
5. Should I Rent or Buy – What is the market doing right now?
The real estate market is all about supply and demand at its core.
When there are many homes on the market and not a lot of buying activity, the buyer will have the upper hand. The average purchase price of a home during a buyer’s market will decrease since the buyer has options and the seller might not.
On the other hand, it’s considered a seller’s market when there are fewer homes on the market and buying is comparatively high. During this type of market, it’s not uncommon for multiple buyers to bid and for a seller to receive over asking. This has been especially common in 2022.
If getting a great deal is your top priority, renting while the market cools is not a bad move, especially if your rent allows for you to pocket a good portion of cash each month. This will allow you to save in anticipation of purchasing a house, even if the market stays hot for a long time.
Final Thoughts
Many financially focused individuals believe that buying a home is a far superior option to renting because of the equity building and tax incentives that go hand in hand with home ownership.
While it’s true that purchasing a home is often the better decision down the line, there are a number of factors which leverage renting as a viable and intelligent solution as well. It all depends on you, your financial situation, your goals, and the current market health.
Ask yourself our above five questions to decide if renting or buying is the right decision for you.
If you are interested in Columbus Ohio real estate market, you can check it here and contact us at any time. Thank you
