When Renting Makes Sense
About 31% of people who live in houses are renters. That is partly because the average price of a home in CT in 2006 was $287,500, and average condo was $192,500. The decision to buy can be complicated, especially when there is a lot of uncertainty in the housing market. While owning a home is a desirable goal, especially when values are on the increase, sometimes renting is a better option. "Home buying is not for everyone - and certainly not for everyone at every point in their lives," says Eric Tyson, co-author of Home Buying for Dummies. "You really need to assess your overall expenditures, not just your housing expenditures, and ask yourself if you really can afford to buy." Renting also keeps you away from the prospect of foreclosure or drowning in a mortgage.
Make sure you can comfortably afford it before taking the leap to home ownership - you don't want to struggle with being "house poor." Home ownership comes with many hidden costs. Of course there are the large down payment, thousands of dollars in closing costs, mortgage payments, insurance and property taxes. But maintenance, repairs, and home improvements can easily add up to thousands of dollars a year - usually at least one percent of the home's purchase price. For example, if you buy a $200,000 home, you should plan on spending $2,000 a year just for repairs and maintenance. Then there are big expenses. A mid-range roof replacement averages $11,164. You can also expect a significant outlay for appliances and home furnishings.
For young people, it's a good strategy to get one's financial life in order before taking on the kind of debt required to buy even a modest condo or starter home. Plus there's the thousands of dollars you have to spend on little and big things, like landscaping a new home, a mailbox, towel racks, new locks, window coverings, etc.
Here are some examples of when it may make more sense to rent:
- Older people selling large houses. "In some cases, given their age and lifestyle, it doesn't pay for them to buy a smaller house. Or they may be temporizing until they decide whether to move to Florida or closer to the kids or something else," says Diane Saatchi, Senior VP with the Corcoran Brokerage.
- People who think they'll have to move frequently for their jobs. Most financial advisors recommend not buying if you don't plan to stay for at least five years. "Residential real estate has relatively huge transaction costs," Tyson said of the broker's fees, closing costs, registration fees and other expenses associated with the purchase of a home. "To buy and later resell, figure [on costs of] about 15 percent of the home's value. That's huge, and it means you have to stay put, ideally for at least five years, to recoup that 15 percent." "The costs for buying and then selling a home - which can include a real estate agent's fee, a transfer fee, closing costs and inspector and surveyor fees - could add up to 10% of the sale price, or roughly 1.5 years worth of rent. It you average that over two years, "you're paying an awful lot of money to own a house for a short period of time," says Dean Baker, co-director of the Center for Economic and Policy Research.
- New job: New employees should consider staying in their jobs for at lesat a year, in an effort to guage the security of their new position, before they even consider buying a home, according to Ellie Kay, finance expert and author of "Getting Rich for Less."
- People who want to live in areas where home values have risen rapidly. Buying a home may mean mortgage payments of $5,000 a month or more. They are so stretched that they can't afford to buy furniture. Or they may end up with a long commute.
- People who don't have the money needed, not only for the mortgage, but also for the other expenses that come with ownership, like real estate taxes, insurance, condo fees, and repair and maintenance costs. Think about what would happen if one of you lost your job - would you be able to afford the costs?
- People in unstable romantic relationships. If you break up, you will have to figure out how to account for equity, how to disposition the house (perhaps having to sell in a down market, or having to buy out your partner), and also how to carry the house on one income.
- Coming off a divorce. When homeowners get divorced, at least one has to move out. It may take a while to recover financially. Also, divorce is very stressful, and many newly divorced people do not want the added hassle of shopping for a home, mortgage and insurance and the responsibilities that come with home ownership and maintenance.
- Those who want to check out an area before making a long term commitment. Renting for a year or two will give you a chance to see whether the location and community are right for you.
- Unreliable income. Ask yourself how long you can manage home ownership without a paycheck if you lose your job or become seriously ill. If you work for yourself and there is downturn in the economy, the bills associated with home ownership will not go away. Financial advisors recommend saving up a cash cushion of at least 3-6 mos. before buying a home.
- Other priorities. Make sure ownership won't interfere with other financial goals like buying a car or saving for college or retirement.
More info:
Sources:
- 10/4/06 Hartford Courant, For Some, Renting is Better than Buying, by Eileen Alt Powell, AP
- 11/5/2006 Hartford Courant, Homeownership Comes with Many Hidden Costs, by Ieva M. Augstums, Dallas Morning News
- Better to Buy or Rent? Anna Prior, The Hartford Courant, 08/30/09
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