Thursday, April 12, 2018

Renting Vs. Buying: What are the Costs Associated with Both?

Having recently bought our first home, and before that, renting for about 10 years, I've had many discussions with people about whether or not it is a good investment to buy a home vs renting, and here are some points that a reader sent in, about the costs of owning vs the costs of buying. I'd add a few points to what they cover. For example, when you are renting, your landlord is responsible for taking care of any repairs, but when it is your place, if something happens, you're responsible to pay for it. Yes, hopefully you have home owner's insurance and this won't come out of your pocket, but that is an extra expense that home owners pay. Another thing is the instability of renting- you may be stuck with a hellacious landlord who doesn't pay for repairs that they are responsible to pay for, and you'll end up with the repair costs yourself, despite being a renter. Alternatively, you may be forced to move, and moving costs are quite a lot. We ended up moving in the middle of our lease because it was such a bad apartment, and ended up paying double rent for a few months. 
So far, we've only been home owners for 1.5 years, and I find home owning to be vastly preferable, not only emotionally, but also financially. But here are some other points to consider.

Given the upfront costs associated with buying your own home, millennials prefer to rent. However, as they build their careers, start families, and save; most of them are choosing to buy homes. People who are nearing retirement are also choosing to sell their homes and rent or downsize to smaller homes.

Here are the costs of buying and renting that will help you to make your choice:

Costs of Buying a Home

Upfront and Closing Costs

Buying a house has many upfront costs that include:

Down payment – it refers to a percentage of your home’s value that you pay up front. When making an offer on a home, you should specify the down payment amount. If the seller agrees, you can change the amount prior to closing.

Earnest money – this money shows the seller that you are serious about purchasing a house The amount ranges from 1-3 percent of the home’s price.

Property taxes – because homeowners pay taxes upfront, you will have to compensate the seller for any taxes that he pays between the closing date and the current tax season’s end.

Home appraisal – to make sure that the value of the house matches its offer price, a lender will conduct a home appraisal before he approves your loan. This will cost anywhere from 300 to 500 dollars.

First year homeowner’s insurance – before the closing date, your lender will ask for proof of homeowners insurance. This means that you need to pay the premium for the first year up front.

Recurring Costs
Owning a home also means dealing with many recurring costs, which include:

Property taxes – your city will set your property taxes, which will pay for infrastructure, local schools, as well as other services. Taxes change from one year to another and the rates vary widely by location.

Loan repayments – you will need to pay monthly interest and principal as long as you have a mortgage loan. If your mortgage is fixed-rate, the payments will be constant but adjustable-rate mortgages have changing rates.

Private mortgage insurance – if your down payment was less than twenty percent, you will have to pay private mortgage insurance. This money protects your lender from making losses if your home is foreclosed and sold at a discount.

Costs of Renting
Upfront Costs
When renting, you will not part with a lot of money upfront. Here are the common upfront costs:

Security deposit – whether you are renting a condo or apartment such as Bellevue WA luxury apartments, you need to pay a security deposit to insure against delinquent rent, property damage, and broken leases.

Moving costs – you have to pay to move your possessions from one house to another. Whether you rent a truck or hire movers, you need money.

First month rent – most property owners ask for the first month of rent upfront.

Nonrefundable deposit – depending on the rental property laws and your living conditions, you might have to pay a nonrefundable deposit on top of your security deposit.

Recurring Costs
Monthly rent – unless you live in a rent-controlled neighborhood such as Wall Street, you should expect the cost of rent to go up at any moment. The monthly rates of rent vary depending on the number of occupants, location, and condition of the rental.

Utilities – your monthly utilities such as internet and cable might be included in the rent. In other residences, you might have to pay for these costs separately.

Renters insurance – it protects your belongings against theft and damage.

Now that you know the costs associated with renting and buying, you should be able to decide which option is best for your needs. It's not really all about the cost, but it does play a big part when deciding between renting and buying. It's best to inform yourself on everything, like rental laws, mortgages, etc. before deciding what's best for you.

See my disclaimer.