Should I buy or should I rent? This question has been around forever. Until the 1970s, it was very easy to answer this question using financial rules of thumb.
The basic rule of thumb used to be this “ Buy if you will be in the home long enough for price appreciation to cover your buying and selling costs, otherwise rent”.Until 1978, any holding period greater than one year was sufficient to achieve a positive return on equity. Such a dynamic real estate market combined with deductibility of mortgage interest and property taxes made the decision to ‘buy or rent’ a no-brainer.Economic factors clearly steered one into buying.
Except for some random occurrences, house values have tended to go up throughout the nation from the end of the 2nd world war to the beginning of the 1980s. The spurt in interest rates in 1979 resulted in a leveling off of home appreciation. Then, in the early 80’s, real estate values actually declined. As a result, real estate is no longer viewed as an investment that always goes up in value. For the first time in recent history, we have begun to recognize the fact that house prices can go down as well as go up.
Now, back to the question – Buy or rent? Does all this mean that one shouldn’t buy a house? The answer may sound ambiguous and wishy-washy. But, the decision is not as clear-cut as it used to be. It depends on an individual’s circumstances.
The most critical factor in this decision is your likelihood of staying in the house for a reasonable length of time so that you are able to recoup your selling expenses. You should be confident about being in the home for at least 3 years. Five years is a safer length of stay. Again, this may not be as critical for some of you who work in the corporate environment where many of the companies take care of 100% of the home selling expenses for their employees.
We should also keep in mind that buying and renting are complementary components of total housing demand. If more people started to rent, rental prices would increase and thus tilt the pendulum in favor of home ownership and vice versa.
So far, we have focused totally on the financial aspect of real estate ownership. What about ‘pride of ownership’ and‘ a sense of community belonging’?After all, owning a home still remains the “American Dream”.
Real estate has both investment and consumption aspects to it. You need to outline the benefits that you perceive in owning a home and evaluate it against the added cost and responsibilities that come with it. In my mind, real estate is more a lifestyle choice than a purely economic decision. The following list of benefits versus responsibilities is by no means exhaustive but may help you get started in the process so that you can make an intelligent decision.
Pros
Cons
Equity build up each month
Less money for other things
Pride of Ownership
More Responsibility
Opportunity to be fit
Mow the lawn every week
Sense of space & privacy to unwind
Need More time to clean
More storage for your treasures & Junk
Become a packrat
Stable neighbors-more so than in apartment
What if I don't like the neighbor?
Can do laundry any time
It never gets done! Just kidding
Warm garage for your automobile - can sleep longer because you don't need to scrape the windshield or warm the car
May need to shovel the snow
Safe fenced area for your children and pets
No pool/tennis courts /clubhouse as in apartment complex
Fuzzy, warm feeling of owning your home
Those darned mortgage payments
Relaxed - No need to worry about children making too much noise and disturbing the neighbors upstairs or downstairs
You have lost a great excuse to get them to be quiet
No headaches from the loud music upstairs or downstairs
If only the neighbor's dog would quit barking!
Short haul of the groceries from the enclosed attached garage to the kitchen
Not enough workout for the biceps and the triceps
In summary, we spend almost 2/3rd of our day at home. The pleasing surroundings of this place that we call “HOME” must (among many other things) impact our psyche in many ways. This is not a quantifiable benefit, of course. Most of us would probably choose the warmth of a single family home over the purely institutional feel of multiple dwellings with their long, narrow, and dark hallways.
Bear in mind that this is a realtor speaking with a totally objective perspective!
The basic rule of thumb used to be this “ Buy if you will be in the home long enough for price appreciation to cover your buying and selling costs, otherwise rent”.Until 1978, any holding period greater than one year was sufficient to achieve a positive return on equity. Such a dynamic real estate market combined with deductibility of mortgage interest and property taxes made the decision to ‘buy or rent’ a no-brainer.Economic factors clearly steered one into buying.
Except for some random occurrences, house values have tended to go up throughout the nation from the end of the 2nd world war to the beginning of the 1980s. The spurt in interest rates in 1979 resulted in a leveling off of home appreciation. Then, in the early 80’s, real estate values actually declined. As a result, real estate is no longer viewed as an investment that always goes up in value. For the first time in recent history, we have begun to recognize the fact that house prices can go down as well as go up.
The most critical factor in this decision is your likelihood of staying in the house for a reasonable length of time so that you are able to recoup your selling expenses. You should be confident about being in the home for at least 3 years. Five years is a safer length of stay. Again, this may not be as critical for some of you who work in the corporate environment where many of the companies take care of 100% of the home selling expenses for their employees.
Real estate has both investment and consumption aspects to it. You need to outline the benefits that you perceive in owning a home and evaluate it against the added cost and responsibilities that come with it. In my mind, real estate is more a lifestyle choice than a purely economic decision. The following list of benefits versus responsibilities is by no means exhaustive but may help you get started in the process so that you can make an intelligent decision.