Renting Vs. Buying Your First Home: Pros and Cons
Are you debating whether to buy or rent your first home? If you are, then this post is for you!
While there are many things you obviously need to consider prior to making your decision, one important factor that should influence your decision is how much you are willing to spend.
Every single day, people choose to rent largely because of the flexibility and minimal responsibility it provides, explains Dave Knight of Orlando Property Management. And this is even though they could get a potentially larger net worth over time if they chose to own a home instead.
By the same token, people choose to buy homes when renting could make more sense financially. For them, homeownership is a source of pride and provides a place to put down roots.
Clearly, both options have their own unique pros and cons. And, understanding these strengths and weaknesses could help you make the right decision. Here are some points to ponder.
Pros of Renting a Home
Pro #1: Frees up your savings.
There are many costs associated with owning a home. Good examples of these costs include property taxes and maintenance costs. These can greatly diminish how much savings you’re left with.
But when you’re renting a home, the only cost you have to think about is the rent. And once you’ve paid it, you’ll be able to spend or invest your savings elsewhere.
Pro #2: Renting gives you more flexibility.
This is, without a doubt, the main reason why many choose to rent. As a renter, you have no ties attached to the property and can leave whenever you want so long as you provide adequate notice.
This is an option that homeownership doesn’t provide.
Pro #3: Allows you to diversify your investments.
With homeownership, most of your savings, if not all, will be going towards servicing a single investment. In contrast, renting allows you to use your savings across multiple investments which helps spread out potential risk.
Cons of Renting a Home
Con #1: You’re bound by the terms of the lease agreement.
As a renter, you don’t have the freedom to do whatever you want with your rented premises. In most cases, you cannot, for instance, paint your preferred paint color or renovate the property.
Con #2: Rents often fluctuate.
Generally speaking, landlords usually raise rents at the end of every lease cycle. This is often as a result of things like increased property expenses and inflation.
Con #3: Your landlord may refuse to renew your lease.
There is no guarantee that your landlord will renew your lease at the end of a lease cycle. He or she may decide, for whatever reason, not to renew it.
Pros of Buying a Home
Pro #1: You get freedom and stability.
If you’re thinking of having a family, then owning a home can help provide your family with much-needed stability. In addition, by owning a home, you get the freedom to do what you please.
You can, for instance, keep a pet, make significant renovations to your home, and have more control over your energy footprint. These are things that only a renter can dream of!
Pro #2: Your home’s value can increase.
Homes, broadly speaking, appreciate in value over time. This can help you build wealth over a certain period of time.
Pro #3: Your home will build equity.
One primary financial benefit of owning a home is the ability to build equity. When you service your mortgage every month, you are essentially racking up some equity in your home. In fact, your home equity is equal to your down payment plus your total mortgage payments.
So, you can build equity simply by servicing your mortgage payments at the end of every month. You may then be able to use the equity that you have built over some period of time to fund another investment.
Cons of Buying a Home
Con #1: Buying a home doesn’t come cheap.
It costs about 4 percent of the sale price of your home to sell (advertising, agent fees) and about 6 percent of the purchase costs to buy (loan fees, conveyancing costs, government fees, stamp duty).
Not to mention ongoing running costs like water and insurance costs, body corporate fees, depreciation, repairs, and council rates.
Con #2: You’ll be paying interest.
Interest rates can fluctuate during the term of your loan. This is especially true if you opted for a variable interest rate as opposed to a fixed one.
Con #3: There are opportunity costs.
Buying a home means your money will be tied up in the property. This is money that you could’ve used for your business, for travelling, studying, or for entertainment.
As can be seen, each option has its own set of strengths and weaknesses. You need to consider many aspects. For instance, lifestyle, family needs, investment goals, appetite for risk, and more importantly, your financial resources.