Rent or Buy – 5 Questions to Answer

My upcoming column is about the rent versus buy decision.  Here’s a portion of the column:

If the rent versus own decision was based purely on economics it would be fairly easy to make. Just plug in certain economic assumptions and take away any emotional factors. Unfortunately, this decision is also one packed with feelings and emotions. So, if you are in attempting to make such a decision, I offer five questions that should be asked and answered.

1. How long will you live in the house that you buy? This is the single most important question, and the most difficult to answer. It is not sufficient to say, “until we get tired of it,” or “until we get transferred,” or “until we have a family.” To make this decision an assumption will have to be made in order to make the economic calculations.

2. Will residential values in the neighborhood rise, fall or stay the same? When you become a homeowner, and then later on a seller, you will incur costs as the seller. These costs will typically be 7 to 12 percent of the selling price. That means that the property must increase by that percentage just for you to break even. Obviously, you do not want to live in a neighborhood where prices are going down.

3. Do you really like the house? Every property is unique, just as every buyer is unique. If you have found the house of your dreams and you plan to live there forever then my advice is always to make your best offer first before someone else buys it out from under you. The satisfaction of living in a house that you love makes life quite enjoyable.

4. Will the house meet your needs in the future? As a renter, it may be just fine to live in an 800-square foot apartment with another person. But as time goes on people tend to accumulate things that require more space, not the least of which may be a child or two. You may do very little entertaining now, but your future job or your social situation may demand that you have more space for visitors in your home.

5. What percent of your income do you spend on housing? The old rule of thumb was that 38 % of your gross income was the maximum you should spend on housing costs. I still like that figure. Housing costs as an owner, however, are quite different than housing costs as a renter. Homeowners must take into account such things as repairs, maintenance, certain insurance costs, property taxes, etc. Renters just pay the rent and call the landlord when the sewerage line backs up or the dishwasher stops working.

One response to “Rent or Buy – 5 Questions to Answer

  1. Great overview of the non-emotional reasons people should explore when considering buying a home. So many people forget that at the end of the day it is one of the most important financial decisions you will ever make.

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