How to Know if You Should Rent or Buy a Home

Buying a home is not a decision one should be making without careful planning. Many factors need to align for you to make a favorable deal, from your current cash flow to a current state of the market. This article explores the essential determinants you need to consider before renting or buying a home.

Your Budget:

The budget should be your primary concern when you are deciding if you want to own a house, whether you are renting it or buying it. The best way to calculate your things is to subtract your spendings from your earnings. Think about all the things you spend your money on, from food to transportation. One CNN article argues that your housing costs should not take more than a 30% of your total income, regardless of whether it is renting or owning.

Think About the Financial Impact:

When deciding on whether to rent or own a home, you should rely on Fidelity recommendation. You divide a home price by the yearly rent, and if the ratio is less then 20%, buying is, mathematically speaking, a more logical choice. Furthermore, you have to think about the interest rates. If your budget can sustain it and the interest rates on mortgage loans are reasonable or favorable, then it is time to buy. When calculating the better option, you should think about your budget, interest rates, maintenance, buying price and the potential selling price.

The more factors you include, the better. You should also think about the time you are planning on spending on your new property. Also, owning a home can turn out to be a smart investment decision even if you don’t consider yourself as an investor.

Money You Could Have Made:

Opportunity costs are the driving force of the capitalist based economy. When buying a home, you need enough money to cover all the legal fees, put a down-payment on your newly purchased home, money to close the deal, etc. The price goes up the more expensive the property is. On the other hand, renting a home requires that you pay a month or two in advance; that’s it. But if you want to own a house, include in your calculations factors such as property taxes and insurance. It is all about timing.

When deciding on whether to buy or rent,  you have to think long term. It is hard to predict the market prices, but you have to do as much research as you can. Preferably, you should discuss these things with a professional financier. When buying a home you risk a lot of money (and you risk it instantly), perhaps it is better to invest that money in something else and just rent a place. In any case, you have to think about the money you could make or lose if you pick either option.

Think About Taxes Benefits:

Governments tend to encourage people to buy homes for numerous reasons and will offer tax benefits to all those who purchase a home. President Trump’s administration passed new tax reform, and if you are unfamiliar with it, you can read it here. Homeowners should take advantage of these tax benefits if such thing is possible. Though the new reform put limitations on those benefits, there is still enough maneuverable space for you to save a lot of money. Sometimes the tax deductions can be the deciding factor between buying and renting. However, you should also think about the longevity of these policies because they are susceptible to change (for better or worse). It is just another thing to keep in mind when making a permanent decision.

Personal Responsibility:

Things change rapidly when you own a house. Subtenants have the option to call their landlords if they have a problem they can’t deal with. Furthermore, while renters can leave the rented apartment if they don’t like it, homeowners can’t. So, if you aren’t ready to be held accountable for the state in which your home is in, then you should probably wait a while with your purchase. Purchasing a home can be the or the worst decision of your life, depending on your personality. Some people gladly accept all the freedom and the responsibility that come with owning a home, while others can’t handle the pressure. For example, a storm may wreck your roof, and it is up to you to fix it (either personally or by paying a professional).

If you do decide to buy a home, make sure that your paycheck can cover the payment, the maintenance and the unexpected costs that occur when you own a home. Think about the market, the mortgage interest rates, opportunity costs and all the other factors you can think of when making a decisino: the more the better.

Edward Schinik is the CEO of Yorkville Advisors

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