In real estate, it’s a question that’s been asked for ages – is it better to own or rent a home?
You can do countless research online and find compelling arguments on both sides.
For years, the more common and traditional belief is that owning a home is ALWAYS a better and smarter long term investment. It’s the American dream, right!? Those arguing in favor of owning a home will say it’s a better long term investment, you’re not paying someone else’s mortgage, the tax write offs, appreciation, and the ability to call something your own.
But when you ask that same question to a different generation, you may get a much different answer (I’m looking at you millenials… Just kidding :))
Renting does offer some advantages as well – no long term commitments, no expensive fixes when something breaks (call the landlord!), and you don’t have to worry about market values (2008-2010 scared many).
Here are a few factors to consider when asking yourself, is it better to own or rent?
Timing
When I meet with clients, one of the key “discovery” questions I ask is, how long are you planning on living in your next home? Timing, in my opinion, is the most important factor to consider when asking is it better to own or rent.
If you plan on being in your next home for at least 3-5 years, then I believe it’s better to buy. Over the lifespan of home ownership, there are plenty of financial benefits. You’re paying down principal, so you’ll owe the bank less when you sell. Also, you can write-off taxes and interest, so that’ll could help you come tax season (talk to an accountant for more details, but the savings are there). And last, if you’re in an area where prices continue to rise then you could benefit from appreciation.
You can also customize the home to your liking, and you don’t have to ask the landlord if you want to make any changes. It’s your home!
On the flipside, if you think you’ll be in your home for only 1-2 years, then it might be better to rent. One of the big costs with home ownership are the closing costs, on the buy & sell side. By renting, you’ll avoid those hefty costs, and you won’t have to worry about losing as much money over such a short period of time.
At the same time, I’ve seen homes in fast appreciating areas gain 10-20% in just a year or two! Most recently, I’ve seen Chicago condos appreciate anywhere from $50,000-$200,000 in just a couple years! Now this is not always the case, and it’s more of an exception to the rule, but it can happen… Which brings me to my next point…
Location
Location plays a huge role in determining whether it’s safer to rent or own. If you’re in an area where values have been on the rise, and there is talk of more development coming to town or anything that will help values, then it might be a good idea to buy even if you won’t be there long! When there was first talk of Amazon coming to Chicago, I had two buyers call me immediately and tell me they wanted to look at Chicago condos in the South Loop asap! Location and future development play a big role.
Now, if you’re purchasing in a location that’s a little further out from the city, or values have been inconsistent the last few years, or you’re just not sure you’ll like the area, then renting may be safer for the short term.
But again, I believe this all goes back to timing. You can still buy in an area that’s a little further out, and it’ll probably be cheaper… just make sure you’ll be there for at least 3-5 years!
Your Financials
It’s always a good idea to have a good understanding of where your financials are at whether you’re renting or buying. If you’re still paying down a ton of debt, and you don’t have a lot in reserves, then it might not be a good idea to buy. Build up some savings, pay down debt, and make sure you’re in a good position to buy.
As the same time, you don’t need to have 10% or 20% down to buy, that’s a big myth! Today, you can buy with as little at 3% down. At this moment, I’m working with home buyers that could theoretically buy a house and put less than $7,000 down!
Another myth is that you need 720+ credit – that’s 100% false. While having good credit will give you a better interest rate, it doesn’t mean youneed it to buy. There are lenders today that are working with buyers that have credit scores in the high 500’s and low 600’s. If you have any questions about qualifying for a loan, contact us and we can get you in touch with a lender. You can also click here for 5 quick financing tips to prepare you for buying a home.
Market Conditions
This is a difficult one because 1. we all need a place to live, whether buying or renting, and 2. no one can predict the future of the real estate market. Many experts can forecast and try to predict what’s going to happen, based on past history and the information available today. And some may end up being right. But there’s really no way to know until we look back.
Market conditions do play a role in whether or not it’s a good time to buy, but I believe it’s more for investors. At the peak of the real estate market in 2006/2007, many investors stopped purchasing real estate and waited out the next crash. Sure enough, 2008 came along and the recession hit. Prices bottomed out for the next couple years as our country endured one of the worst financial crisis since the Great Depression.
But guess what? Anyone that invested in real estate from 2010-2011 is more than likely in a good equity position if they still own that home today. You have to be able to take risks during a downturn in the market in order to see long term gains. Warren Buffett made $10 BILLION during the most recent financial crisis! He didn’t make all of the money from the real estate market, but the point is, you have to take risks.
Understand your current market conditions, do the research, and make the best decision possible when weighing out rent vs buy.
At the end of the day, this decision all comes back to timing and how long you’ll stay in your home, in my opinion. Just like the stock market, you can ride out the bad housing markets if you plan to hold on to the property for 15-20+ years. I truly believe that if you’re in it for the long haul, and you’re not afraid to take calculated risks, buying real estate is always a better decision instead of renting.
As always, feel free to get in touch with any questions or feedback, or pass this along to anyone you know that is thinking about buying or selling real estate!
Pat Kalamatas
312.217.4398 c
patrick@103realty.com
