The question of whether to rent or buy is one that many people have to consider at one point in their lives unless they are lucky to have a house handed down to them. Each option has its pros and cons. While owning a home may free one from paying rent, they may end up paying a mortgage to a financial institution. When one is deciding on whether to buy or rent, they have to consider the financial implications of their decisions such as investment costs, the cost of ownership, taxation, equity, and maintenance.
Owning a home requires significant cash investments if one is paying the amount in cash. This locks up capital that would have otherwise been invested in other potential income generating activities. However, for those who use mortgage financing, they are likely to free up capital for reinvestment. Comparatively, renting requires significantly less upfront investment since one has to pay rent and perhaps a rental deposit. Furthermore, in instances where the mortgage installments are higher than average rental rates, one is better off investing in a rental. However, if mortgage rates are lower than rental rates, then it is better to own a home.
Aside from upfront costs, renting has the upper hand over owning a home when it comes to closing. A tenant does not have to invest any monies to close since all they have to do is pack their belongings and leave. However, homeowners have to incur transfer taxes, closing fees, title insurance, and loan origination charges among others. Owning a house also comes with financial benefits. For instance, a homeowner can rent out their property. Rent from the house can then be used to offset mortgage payments. In some cases, the rent will exceed mortgage repayments and generate profits.
Tenants have limited control over rental rates while house owners are exposed to market conditions. Landlords have the ability to change the amount that a tenant is paying especially after the current contract lapses. Such changes can be necessitated by the rise in the rates charged by surrounding home owners or at times rent can be increased to get a tenant to leave. Comparatively, house owners find themselves exposed to market forces such as inflation and have to repay fixed mortgage amounts regardless of the performance of the real estate sector.
Moreover, there are tax exemptions designed specifically for homeowners. Property tax and mortgage interest can be listed as expenses when one is filing their tax returns. On the other hand, tenants do not enjoy similar tax benefits. Another advantage of owning a home is that one gets to build equity over time. Each mortgage installment grants a house owner with an increase in their home ownership. Comparatively, when one is leasing a house, every monthly payment they pay does not give them ownership of their property. This means that even if one pays rent that amounts to the value of the house that they are in, they do not gain equity.
Renting has lower maintenance costs. When the plumbing is clogged or if the fuse box is damaged, a tenant calls the landlord to have it fixed. In such a scenario, the owner incurs the cost of maintenance. When one owns a home, they have to incur all the operation and maintenance costs from their pockets. These expenses are not inclusive of periodic upgrades.
Renting places a lower financial burden on a person as compared to buying a house. Even when one sells their home in future for a profit, the amount has to factor in the many years of maintenance and upgrades, inflation, interest fees, taxes, and other miscellaneous fees. Owning a home is ideal for those who intend on living in a particular location for an extended duration of time and only if rental prices are higher than mortgages.
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