Should you rent or should own it? This may be a controversial topic but let us clear up the misunderstandings and go over the facts.
Some may think, “Isn’t renting just throwing money away in the trash while buying a home you are putting it towards something you will own in the future?” Yes, it is but not for a long time. Many individuals pay their mortgages from 5 years upwards to 20 years or more! The first 5 to 10 months of mortgage mostly interest, meaning you are still throwing that money out the window as well. If you are tight on money already, attempting to own your first home might not be the right time for you. It may be great for some, but it could be a potential burden for others.
Although homes generally appreciate there is always a risk of depreciation due to external factors, like companies moving out of the city causing many residents to move away. If the house does appreciate, the home price generally increases by 4% while inflation also lurks behind increasing about 3.5%.
A great way to find out if you should rent or buy is by referring to the price to rent ratio. Find 2 similar prices of a house, apartment, or condo one for sale and another for rent. Divide the sale price by the annual rental cost of the other. If the P/R ratio is over 15 it is most likely less expensive to rent. There are many rent vs buy calculators online to help you with the math.
Many people move from place to place depending on their current job position. Not knowing whether the stay is temporary or permanent makes renting an attractive option. With the money left over, you have the option to invest the money into index funds or many other things. It is important to know your budget for where you would like to live. Keeping total housing cost under 30% of your income, allows you to have the larger financial freedom to invest, buy items you want, or take a trip.
It’s important to ask for help especially if you are not familiar with the location. Many do not know realtors can also help individuals look for apartments as well. A good realtor will know the best areas to look into and find the best deals that are widely advertised. Lastly, their commission is not paid by you like when you buy a house but instead the property owner pays it.
Take upon yourself and strategize if renting and owning is right for you. Using these methods and practices can help avoid regret unwanted housing expenses and find the right time to rent or to buy.
Lucas Zhang was a Finance major at Ohio State University. He writes about finance, mortgages, and technology for Irish Mortgage Brokers.