Renting a Home vs. Buying a Home

Original content by Warriorism.info | Posted August 18, 2011 in Financial Advice

Every person considering purchase of a house will be confronted with a basic questions: "Should I rent a home or should I buy a home?" It would be good to learn about the respective advantages and disadvantages of the two options.

What You Think May Not be Right

Buying a home is the dream of most people and they often assume simply that buying a house is the best option. Unfortunately it is not always better. In some cases renting could be a better option instead. The situation will vary depending on the merits of each of the cases in your circumstances at that time. That is why it is necessary to have a close look at them.

Advantages of Buying a House

Some of the major advantages of buying a house would be –

• Over the time mortgage decreases and equity builds up;
• Owner has complete authority for personalization and restructuring of the building; and
• Owner can get tax advantages or rent out the house for financial gains.

Advantages of Renting

Major advantages of renting instead of buying would be –

• More fixed costs would be there for the term of the lease;
• Lessee will not risk losing equity;
• Lessee can simply move away on completion of the lease terms;
• Maintenance costs are fewer.

Disadvantages of Buying

Some of the disadvantages of buying a home are –

• Owner has to sell the house for moving elsewhere;
• Works and maintenance costs are higher;
• Large initial investments are required; and
• Loss of equity in case of future inability to repay loans is obtained.

Disadvantages of Renting

• Whatever the rental is the lessee cannot gain equity;
• Personalization of living quarter is not as possible; and
• No tax advantage occurs on renting for lessee and landlord gets all such benefits.

Formulas

A simple method to calculate would be multiplying the rent by 20 years and find whether houses are available below that amount so that buying may be the better option. For instance; if you are paying $500 towards rent per month, the annual expenses would be $6,000 and in 20 years you pay $120,000 or at most $150,000 taking into consideration yearly escalation. If a decent house is available in your choice locality in that amount then buying would almost certainly be the better option in all financial ways. Otherwise, you may need to get a mortgage quote to figure out how much you would be paying for your mortgage per month, then consider that in addition to your deposit in comparison to your monthly rent payment. You may find that renting would cost you less per month, but if not buying would be better than renting in that department.

Another popular formula is to divide the annual rent you pay by the purchase price of the home you would buy. If you get 3% or less, you rent. 9% or more, you buy. Everything in the middle is a judgement call, but you can see that 4% is leaning towards rent and 7% is leaning towards buy. So, to make an example if you are considering buying a $300,000 home or continuing to pay $1,000 per month in rent, you would divide 12,000 by 300,000 giving you 4%.

Conclusion

In most of the cases it is better to buy a home rather than renting one if you are financially able, since much of the disadvantages (i.e. extra cost) and limitations are felt upfront whereas renting usually costs more long-term. But in some cases renting could be the better of the two options. In any case, you as the end user are the best judge and chooser of what will best meet your needs.

Do you have any questions about renting a home vs buying a home? Or do you have any of your own tips about how to decide between renting or buying a home? Please post your questions and comments in the Business and Finances section of our forums!

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