Should You Buy or Rent?
Get any group of people together for a discussion on whether it is better to buy or rent your home and you will be sure to have a passionate debate on both sides of the argument. There are a lot of points thrown around as "set in stone" rules that all should abide by, but the truth of the matter, as in most debates" is - it depends. That sounds like a cop-out answer so let's dive in a little deeper and see what it depends on and what factors sway the decision.
How strong are you financially? We'll start here because if you can't pass the financial strength test, there is no reason to dive deeper and torture yourself over the decision to rent or buy. Continue renting as frugally as possible until you can answer Yes to all of these questions:
How long do you expect to live there? Determining how long you expect to stay in your home is one of the most crucial factors. There are significant costs to purchasing and selling real estate including closing costs, loan fees, and realtor fees. You can reasonably estimate 2-5% of the loan amount in closing costs and 6% of the sale price at disposition. In most cases (but not always) you won't recover these costs through appreciation in less than a couple of years unless you are "forcing appreciation" through sweat equity like remodeling the home. Remember that you are most likely going to pay capital gains taxes on any profits unless you live in the home for two of the five years previous to sale. One other caveat is that the housing market is somewhat unpredictable and selling may not be an easy or profitable endeavor if you have to sell quickly. Bottom line: unless you have a specific strategy- it is better to rent if you plan to move within a few years.
What is the growth rate of prices and rents? There are a lot of data sites such as City-data.com that will give you historical growth rates of median home prices and rents but you will have to make some educated guessed on where things are heading. If you expect rents to rise significantly over your time horizon and can lock in a fixed rate mortgage that you are comfortable with, that may be your best bet.
What is important to you? It will take more than a financial analysis to help you decide if you should buy or rent. What is important you? The freedom and flexibility to move that comes from renting, the long term stability and pride of home ownership? Do you enjoy fixing things yourself and maintaining a property as your own or would you rather have someone else be responsible for repairs and maintenance so that you can spend your time (and money) doing other things?
Here are a few myths that I hear a lot but don't believe to be true:
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