Renting vs. Buying a Home: Deciding What Works For You
Contemplating renting vs. buying a home can be overwhelming at times. Owning a home has its benefits, however, you may be asking if continuing to rent would be better for you. You’re not the first person to consider this scenario, and you won’t be the last — so we’re here to offer some insight that will help you decide whether renting or buying would be the better choice.
More often than not, you’ll hear that buying a home is one of the highest achievements a person can reach in our society; there are tax breaks, you don’t need permission to make décor changes or have pets, you and your family can build relationships with your neighbors and grow roots in the community — the list goes on and on. But at times, you’ll hear homeowners saying they regret their purchase due to cost, location, or other factors. And sometimes you even hear influential, motivational speakers preaching that homeownership is a waste of money.
At the end of the day, you have to sift through all the pros and cons and decide what’s best for YOU.
Keep reading for some ideas to consider.
Renting vs. Buying – Let’s Run The Numbers
Deciding whether or not you’re ready to buy a house is the first and most essential piece of the real estate puzzle. When weighing renting vs. buying you have to ask yourself: can you afford the home you want? Are you realistic in what you want versus what you can buy? Are you currently in a position to buy, or do you need to execute a 12-24 month plan? Here are some of the numbers you need to be most aware of:
– Down Payment and Closing Costs:
It is a huge myth that you need 20% down to purchase a home. Having 20% down on a home has its advantages, but it is NOT required. The majority of homes are purchased with between 3.5% and 10% down. And your closing costs will be an amount over-and-above your down payment. So for instance, let’s say you are purchasing a home for $300,000 with a 5% down payment. You would need $15,000.00 for the down payment PLUS approximately $5,000-$7,000 in closing costs (taxes, HOA fees, homeowner’s insurance, etc.) for a total of approximately $20-22,000.00 that you would need to bring to the closing table. A buyer’s consultation with a real estate expert can work these numbers with you so you know EXACTLY what to expect. Once you have that information, you can configure a targeted savings plan.
– Your Verifiable Income:
Are you a W-2 employee, independent contractor, self-employed, or a combination? Do you have additional income from an inheritance, trust, legal settlement, or child support? How have you been depositing your cash or income and is there a paper trail? What did you claim on your tax returns the past 2-3 years? All of these factors contribute to what a lender will be willing to offer you in terms of financing. Sometimes you will need to file your taxes a certain way to get approved for a mortgage. And if you have enough funds to pay cash for a home, that is not always the best scenario — sometimes it’s best to leverage part of the home and take advantage of a low interest-rate. So make sure to look over all your options with a real estate professional.
– Debt-To-Income Ratio Or DTI:
Whether you’re doing a conventional loan, FHA loan, or you’re a veteran taking advantage of a VA-type loan, lenders want to see that all of your monthly debt payments don’t add up to more than approximately 38%-48%. Sitting down with an experienced real estate professional will allow you to work the numbers, factor your DTI, decide which debt needs to be paid off, and how much you can spend on a monthly mortgage payment. You can also get pre-approved to see what type of loan is best for you.
– Credit Score:
Your credit score will sometimes determine what type of loan you can get approved for and in turn, your monthly payment will reflect that as well. As with all things involving your credit score, the higher your score, the greater your chances are of getting approved and for a lower interest-rate. There are even mortgage loan programs for credit scores starting in the mid-500s, so getting pre-approved is always the number one step. Working with a competent lender that gives you a specific check-list of tasks to accomplish and works hand-in-hand with your Realtor will expedite your success.
– HOA Fees:
There are a variety of HOA fees that come into play and these fees can sometimes be a deal breaker when it comes to deciding on a home. There can be a transfer fee, delivery fee, resale certificate, annual dues, and sometimes a capitalization fee and/or foundation fee — both of which can cost quite a bit. Some of these are negotiable and some are not. Some are paid one time at closing and some are monthly or annually. Make sure your Realtor educates you on every single one of these fees so you know what to expect and are not hit with unexpected costs right before, or after, closing.
– Your Income:
A Landlord or property management company will typically want to see that you make 3-4 times the monthly rent. So if you’d like to rent a home for $2000.00 a month, a landlord will want to see that the combined income for all people living in the home will add up to approximately 6-8000 dollars a month. Some landlords are more lenient than others, and some are more strict. Applicants who are independent contractors, sometimes need more income or greater verification, but approvals usually go off of your gross income.
You will typically need a deposit in the amount equal to one month of rent. So if you’re planning on leasing a home with a price tag of $2000.00 a month, you will be required to put down a deposit in the amount of $2000.00. If you have a credit score on the low end or you are not a w-2 employee, sometimes a landlord will require you to put down a double deposit in order to feel confident approving you to live in the home. If you have pets, you will need to put down an additional deposit, which is sometimes non-refundable.
At the end of the lease, if everything goes as planned and you give your landlord ample notice upon move-out and leave the property the way you found it, you will receive the majority of your deposit back. Real estate TIP: Don’t forget to fill out and send your “Inventory and Condition Form” to your landlord by the due date or you risk losing your entire deposit.
– Full first month’s rent:
Your first full month’s rent will be due on the day of move-in–even if you move into the property in the middle of the month. Then, on the first day of the next month, you will pay the prorated amount of rent from the previous month. Renters are sometimes blindsided right before their move-in date, because this concept is not always explained. (If you are moving in on the first day of a calendar month, this will not be an issue for you.) Make sure your real estate agent lays out this information for you and you understand the timeline so you can properly budget.
As a General Rule of Thumb: Think About Your 3-Year Plan
If all the numbers add up for you, and you’re in good financial shape to buy a home, decide where you want to be in three years. If your answer has a specific geographic location tied to it, buying a home is a healthy option. But if you aren’t sure where you want to be living for the next few years, renting may be your best choice while you wait for a clear answer. Not only does renting offer more flexibility once you ultimately decide where you’d like to buy, but it’s also a cheaper short-term option.
Buying a home is beneficial if you plan to live in it for at least three years. Any less than that, and at closing you will probably lose some funds by the time you pay commissions, fees, and closing costs.
Renting vs. Buying Doesn’t Have Just One Clear Answer
When considering renting vs. buying, a house may not always be a good investment, and renting isn’t always throwing money away. When you pay rent, you get shelter in return; that’s a good thing. Having a place to live puts you in a better position than many people. Beyond having a roof over your head, renting your home might be the catalyst that enables you to save money for a down payment on a future home purchase.
At times, renting can be a better financial move than buying. Continuing to rent and investing the cash you’d otherwise put into a house (for repairs, a down payment, taxes, etc.) could eventually create more wealth for you than buying.
And on the flip-side, come to grips with the fact that if a house is going to be your primary residence, it will NOT be an investment; plan on making it your HOME. It is an amenity that you get to enjoy while you live your life and make memories with family and friends. You’ll spend money on maintenance, upgrades, renovations, etc. and probably never get that money back. But that’s life!
There’s Always A Reason
There are a variety of ways to look at the decision to rent vs. buy. Sometimes it’s as simple as whether or not you have the funds to make a purchase. Or maybe you’re waiting for your credit to improve. You may be waiting on another family member to decide where they’re settling. Your kids might be moving out in a couple of years. You may plan on having more kids. Or you may wish to be in a better school district, or move into or out of the city. Some people are waiting on a raise so they can skip the starter home and go straight to their dream home. There are so many things to consider and each person or family has their own deciding factors.
Take Your Time
Take your time when debating renting vs. buying. If you’ve gone over your finances, done your research, and you still don’t have a clear answer, we suggest two things. First, continue renting for now. If all signs don’t point to buying a home now — then pause, make a plan, and set yourself up to buy within the next year.
Second, ask yourself how badly do you want it? When it comes down to it, if the numbers have you a little on the fence, but you’re honestly in love with the idea of genuinely owning a home that’s yours, then go with your gut. When it comes to home buying, let logic clear a path for your emotional fulfillment. A home isn’t just something you own — it’s where you live your life. It’s okay to weigh your feelings as heavily as you want, just make sure they’re balanced with sound advice.
Living Houston Can Help You Rent, Lease Or Buy
Some people are in love with the idea of being a homeowner. They don’t want anyone else telling them what they can or cannot do on their own property. You can’t put a price on freedom, so sometimes owning your own home is the only thing that will satisfy you. Living Houston prides itself on our proprietary buyer’s consultations. We take you through the entire emotional AND logical side of the process to come to a balanced decision on what is best for you. And at the end of it, you’ll walk away with a step-by-step plan to get you exactly where you want to be at exactly the right time.
Whether you decide to rent or buy, Living Houston can guide you through each option. Our apartment locating services can match you to the perfect unit, our buyer’s agents are always ready to help you find your dream home, and we have agents that specialize in leased homes. Whatever your needs, Living Houston has your back; let us know how we can help. Contact us today to get on our schedule.