Buy or Rent? For as long as we can remember, an integral part of the American Dream has been the idea of home ownership. When it came to the question of buying versus renting there seemed to be only one answer. In light of the real estate crash and rampant foreclosures, however, many are now starting to realize that it’s a question that deserves more careful consideration. Home ownership isn’t always the dream it’s made to seem and many people are beginning to realize that renting may often be a better choice.
Even if your personal finances are solid, buying a home when values are likely to drop is almost never the thing to do, and at this point I continue to advise that it’s best to wait before buying a home. I expect the majority of our housing markets to drop a little further and remain bottomed for at least several years, and possibly quite a bit longer. The huge inventory of unsold homes, plus at least another 10 million more that are not yet on the market but soon will be, is likely to keep this the status quo for many years to come.
Once the real estate markets situation improves (see my market evaluations and sign up for Smart Alerts), owning your own home can obviously provide a number of very desirable non-financial benefits. As for the financial benefits, it’s said that a home is your best investment. Is that true? If you look at return on investment, residential real estate tends to roughly track the rate of inflation and little more. Even after factoring in the tax savings involved, a home is not a very good investment unless you happen to buy at a low point in the pricing cycle.
Even in an attractively priced market, buying a home is not a good idea if you are uncertain you will live in the same area for at least the next four to five years. The transaction costs and effort involved in the purchase and sale are too much to justify the purchase in this case. Other reasons to postpone buying a home include if your employment and income are uncertain, if your relationship situation is shaky, or if you do not have a sufficient emergency fund in place. You should have a five- to six-month emergency fund and be essentially debt free before even considering buying a house.
Next, you need to be honest about your ability to handle the total expense load involved. Total expenses include your mortgage payment, taxes, insurance, maintenance, association fees (if any), and a somewhat higher level of utility costs than is normally associated with a rental. If there is a significant risk that you cannot handle this new level of expense, keep renting for a little longer, save more money and, if you can, increase your income level a little farther.
Lastly, homeownership is a big responsibility. If you are not sure you want to take it on—don’t. Instead, save and invest the extra money you would have spent so you have the option to change your mind in the future.
If you do not have any of these issues preventing you from buying and the market is stable and fairly priced, consider the advantages and disadvantages to owning your own home that are listed below to help you decide if purchasing a house is the best choice for you. Be sure to think through each of these factors very carefully.
The Advantages of Owning a Home:
- You are assured a permanent home.
- For many, homeownership offers a sense of pride and accomplishment.
- Buying a home creates forced savings. For most people this is a very big benefit.
It removes some of the pressure to invest your money wisely. A big portion of the decision has been made and your investments are also now more diversified.
- Although maintenance and taxes will continue to rise with inflation, your mortgage payment will not, provided you get a long-term fixed-interest mortgage. If you rent, 100% of your payment is likely to rise with inflation. For many, the inflation protection provided by owning a home offers a lot of peace of mind.
- It is a key component for most people in achieving financial freedom.
The Disadvantages of Owning a Home:
- As already stated, alternate investments, such as a long-term investment in the stock market, are likely to beat owning a home quite substantially over time. This financial gap becomes a lot bigger yet if you are willing and able to pay a very low rent and save the difference.
- It is likely to require a lot more money out of your cash flow every month than you would pay for a rental.
- It adds a number of responsibilities, will probably require a decent amount of work, and take from your free time, especially if it is a detached single-family dwelling.
- You have a large ongoing financial responsibility you may not be able to get out of quickly, except at great cost.
- It may tie up a lot, or perhaps all, of your otherwise free money, thereby limiting your financial options going forward.
It’s time to rethink and reshape the American Dream. Choosing to buy a home shouldn’t be an open and shut case. At any time, carefully look at your situation and ask yourself the above questions to decide if buying a home is the best answer for your personal American Dream.