Buy or Rent a Home?

For generations, buying a home was considered to be the second most important decision a man can make. The first is finding the right spouse.

The question, however, is whether to buy or rent a home? There are arguments for both sides, but it all depends on individual choices and circumstances. To help you understand the variables and evaluate your own situation, ask these five simple questions:

• How long are you planning to stay where you are?

Your intended length of stay has a huge impact on whether it makes more sense to buy or rent. The thumb rule here is, the longer you remain in your home, the more time you will have to spread the cost and realize a hefty profit when you decide to sell.

• Do home prices always go up?

Historically speaking, home prices have experienced more sustained growth. Besides, housing price indexes are a good indicator of the growth potential for your home. The downside is over the long-term, putting too much of your savings into a single, leveraged investment (your house) may be risky.
Buyers who are focused solely on the idea of a house as an investment need to understand that it would be better to buy a smaller size apartment than a large one. Your EMI will be lower and savings higher. You could invest the savings to build a nest when you retire.

• Are you throwing away money on rent?

A common argument in favour of home buying is that owners are building equity in a valuable asset that can boost their long-term net worth. Quite true. By adding a little more to the monthly rent you now pay and using that amount to pay off an EMI makes real good sense.

•  How much will you save on taxes?

Many buyers assume that the costs of home ownership will be offset by tax savings generated by the mortgage interest deduction. They are right. However, in order to receive the benefit, always itemize your tax deductions. Another aspect is that a typical mortgage amortization schedule dedicates the majority of the monthly payment to interest in the first several years of the loan. Over time, more and more of each monthly payment is applied toward the loan’s principal. Keep this in mind.

•  Are you comparing apples to oranges?

To make an accurate comparison between renting and buying starts by factoring in the complete cost of renting a home. Every increase in the monthly rent will add to the cost. Which means, make an accurate assessment of how much the rent would go up by, year after year? If you opt to shift, then every shift will entail an additional month’s rental as you will be paying a month’s additional rent for two places. Then, there is the cost of moving to add on. Rather than simply focusing on rental versus buy decision, consider which option would have a greater impact on your overall wealth and health.

A quick rent vs buy comparison could be done using the price-to-rent ratio. Price-to-rent ratio is calculated by dividing the home value by the annual rent amount. Needless to say, any ratio is meaningful only if you are comparing similar properties.
Take into account the non-monetary benefits each property offers, such as how important quality of life to you and family.