As far back as can be remembered, the traditional American dream was not complete unless it included a small piece of land with a house to call home. However, times have changed, and today’s society is a lot more flexible, with people buying and changing houses almost as much as they would their car.
Considering the fast-paced world we live in today, does it make sense to hold on to this American home-owning tradition, or would you rather rent?
The buy or rent question is a common dilemma for prospective home buyers as there are usually key tax and cost benefits weighing on both decisions. No doubt buying can save you money on taxes, but at the same time, it means you spend more money on your home than you will save on taxes. Therefore, you must consider all possible scenarios before you commit to buying and maintaining a home. In this article, we will provide you with a CPA’s perspective on this particularly important decision.
IF YOU CHOOSE TO BUY…
There’s no doubt – buying a home can save you money on taxes down the road. It’s a viable long-term investment that can help you grow equity and credit for supplementing retirement savings. Also, by owning a home, you’re king or queen of your domain, giving you room to style your home exactly how you want. There’s often certain scenarios potential home buyers worry about before making a purchase, which include:
What if I buy and the value of the property becomes lower?
Whether the value of the property depreciates or not, you will always need somewhere to live. This means that while you might be looking to recoup your investment or even make a profit on a future sale, priority should be on the utility you get from the house as a homeowner. If you plan on moving in less than three years, as your gained equity position is not likely to recoup the costs of the mortgage in that period. Further, if home values were to decline do keep in mind that the cost of rent does not follow house pricing fluctuations in most markets, at least immediately.
However, when buying, you must make a significant down payment to avoid going under from recurrent mortgage payments and would usually recommend closer to 15% of the property’s value as a down payment.
What if rates go down, and I do not have enough for a down payment?
Mortgage rates fluctuate regularly due to market conditions and your credit worthiness, so you should watch the market and your credit score (with a service like Credit Karma) then buy only when market conditions meet your down payment budget. As a rule of thumb, though, home prices typically go up when rates go down, and when rates increase, home prices come down (often slowly). We will have a more in depth explanation of this phenomenon in a future post.
What if I do not have enough of a down payment for my dream home?
You mustn’t get bogged down getting your dream home, especially when you’re buying a home for the first time. Statistics reveal that most first-time homeowners stay for seven years or less in the home they purchase, so you must get what you can afford first-time. After your first purchase, you learn a lot more about what’s important to you in a home, which would help you make smarter buys subsequently. Don’t break the bank on your first home purchase.
Furthermore, you can make upgrades on a property you buy without any hassles and many times as you want, unlike when you are on a rented property which can improve your equity position and the desirability of your home if you were to sell.
IF YOU CHOOSE TO RENT…
The monthly cost of renting a property is typically greater than you would spend on mortgage payments, when renting, there are more people that need to be paid for their services; the land owner, the property manager, and the maintenance staff for example. Though, renting gives you more freedom and flexibility, allowing you to move wherever you want once your lease is up.
In most markets, house rent is 130-160% of comparable PITI (Payment/Interest/Taxes/Insurance) on a mortgage, with 130% going for comparable apartments. In deciding between buying and renting, you will need to examine your needs and wants cause even though there is a sense of satisfaction that comes from owning a property, it might not be the right time in your life to buy.
MAINTENANCE AND FEES
Unlike a mortgage that requires a ~20% down payment, there are much fewer upfront costs associated with renting, and usually, the landlord will cover any maintenance costs. While as a homeowner, you would be required to conduct regular maintenance on the property. Usually, a 25% annual PITI is the expected cost for maintenance, and as a responsible homeowner, you should ensure your property is sellable at any moment by keeping it in good condition.
- Typical maintenance expenses include:
- Plumbing – installing water heaters, fixing leaks, and maintaining the home irrigation system.
- Pest remediation – bugs and rodents
- Property line and fence maintenance
- Maintenance required by your HOA (Homeowners Association)
- Mello-Roos – a fee levied by the city or town for 20 to 40 years after the property is built, used for community development, parks, and planning)
WHAT YOU SHOULD DO IF YOU ARE IN THESE CATEGORIES
The decision to buy or rent would typically depend on each person’s unique condition, but for persons in these categories, here is what we advise, again, it is important that you speak to a CPA or trusted fiduciary about your ability to invest in home ownership:
New College graduates
The stress that comes from owning property might prove too much for someone who is focusing on new career, so it is recommended they rent in the short term. The time and financial resources spent buying a property will find better use in your personal development.
Buying should be a straightforward thing for career professionals, though there needs to be some thought put into the decision. As a career professional, you will need to evaluate your investment opportunity and decide whether buying a home will prove detrimental to your ability to retire or your ability to take care of your personal needs. If buying would prove detrimental, you might want to hold on to the purchase until things are more stable. As an example, if you are a renter and have recently learned you have a baby on the way, a typical response would be that it would be in the best interest of your family to buy a home immediately to raise the new addition to your family. Though in this circumstance it is generally recommended to wait a sufficient period to allow for you to focus on the delivery of your new family member, around 6 months post pregnancy.
If you receive a large sum of money as a gift or inheritance, you must speak with a CPA before deciding what to do, focus on your future. Determine your budget for mortgage payments and the cost of maintaining the property. Also, be sure to take into consideration the intentions of the giver of the inheritance or gift when deciding.
In conclusion, there are merits and demerits to both buying and renting, respectively. At Coastal Pacific Lending, we strive to educate you on the costs involved and with the help of your CPA we will help you in whichever option you choose and assist in which option you should go with at any point in your life.