Whether you’re moving to a new city, your lease is coming to an end or you’re looking to settle down and start a family, your decision to buy or rent a home, apartment or condominium is a big one. What are some of the financial pros and cons to consider when deciding on buying or renting a home?
Buying vs. Renting a Home, Apartment or Condo
There are numerous considerations to make before you decide if buying vs. renting is right for you. To make your decision a bit easier, we’ve compiled a list of true financial pros and cons of buying vs. renting. After learning about the benefits and drawbacks of each, you’ll feel confident and better prepared to make the right choice for your unique situation.
Pros of Buying
Outside of financial aspects, owning a home provides intangible benefits. For example, you have more creative control over the look of your home and ownership grants you a sense of stability and security. The financial benefits make buying a worthwhile investment, too.
1. Build Equity
Owning a home is a straightforward path to building financial equity. Your home can increase in market value over time, and you make gains as you pay off the principal balance on your loan. Building home equity is wise, as it’s considered a beneficial, long-term investment, which can help you grow your wealth.
2. Tax Deductions
Becoming a homeowner makes you eligible for certain tax deductions. Here are two of the key tax benefits you can take advantage of once you buy a home:
- Homestead exemption: Exempts homes occupied by owners from part of the standard property tax burden.
- Federal tax deduction: Allow you to itemize your federal income tax. You can deduct property taxes and mortgage interest to reduce the total burden of your annual income tax.
You’re also eligible to make deductions associated with home improvements.
3. Creative Control
Another pro of buying a home is that you have complete control over how you can spend your money to improve it. You can add new spaces — like a home office — make smaller rooms look bigger by painting walls a light color, finish your basement to make it a game room, buy the best appliances and furnishings you want and more. If you buy a home and want to wait to make any significant, costly upgrades, you have the choice to do so.
Cons of Buying
Despite the benefits of buying, there are still some financial downsides you should consider.
1. Large Down Payment
Compared to paying monthly rent, buying a home requires you to have more money saved. You’ll need to put down a decent sum of money upfront when you buy a home, none of which is borrowed from a mortgage lender. The amount of a down payment for a home varies greatly depending on your location and the property value of the home.
2. More Expensive
Owning a home is an expensive investment. You’re completely responsible for all repairs, improvements and maintenance within your home and on your property. According to The Motley Fool, these are 10 expenses you’ll incur when becoming a homeowner:
- Your mortgage payment
- Mortgage points
- Closing costs
- Property taxes
- Homeowners insurance
- Mortgage insurance
- HOA dues
- Escrow prepaids
As you can see, there are plenty of expenses associated with home ownership.
3. Lack of Flexibility
Home ownership creates roots in your community, meaning it could be harder to move to another town, city or state, especially if money is tight or you have a less than desirable financial future. As a young person, there’s a certain level of freedom that comes with renting compared to buying.
Pros of Renting
Here are some of the pros of renting a home, apartment or condo.
1. Same Monthly Payment
One benefit of renting is that you can count on making the same payment amount each month to your landlord. Paying the same amount of money each month can help you budget more effectively and keep you from overspending.
2. Landlord Pays for Repairs and Maintenance
On one hand, it’s helpful to know that your landlord is responsible for handling any significant repairs or maintenance tasks. Since you’re not the owner, the responsibility of home improvements, appliance installations and basic maintenance falls squarely on the landlord.
3. No Property Taxes
Additionally, tenants of rented spaces do not pay any extra property taxes. As a renter, you’ll never receive a property tax bill — that is the owner or landlord’s responsibility. It’s possible that your landlord or property manager could pass a portion of the property taxes off to you by raising your rent annually.
Cons of Renting
Here are some of the cons of renting.
1. Rent Often Increases Annually
It’s common for your rent to increase year-over-year (YoY). Every time your lease is up for renewal, there’s a good chance you’ll have to pay more. If you can afford rent one year while working one job, you could face financial difficulties the following year. You might not be able to afford rent increases YoY.
2. Landlord Can Sell Property
Since renting for a year is very common, there could be a time within that year when a landlord decides to sell the property. There are a few reasons why landlords sell, but it ultimately means you’ll need to find another place to live. It might cost you more money to live somewhere else, and it might not check the other boxes on your list. If a landlord does sell, they will likely give you a 30-day notice.
3. No Tax Benefits or Equity Building
Many people believe that renting is the equivalent of throwing money away. Your rental space, unfortunately, is not the same type of investment as owning your own home. You pay your landlord monthly rent, utilities and other expenses you agreed to in your lease, and it goes directly in their pocket.
Buy vs. Rent: Consider Your Budget and Financial Goals
Much of your buying vs. renting decision will come down to your financial circumstances. If you have a nest egg saved or you’re ready to settle down and start a family, you might want to think about buying a home. If you live somewhere temporarily, renting is your best option. Consider the financial pros and cons above to help make your decision.
This article Pros And Cons Of Buying Or Renting A Home in 2023 originally appeared on Rick Orford – Invest, Earn More Income & Save Money.