Rent or Buy? For many Americans entering the workforce and building their careers, the decision to rent a property or try to buy a home is daunting and complicated. Common sense thinking would suggest that buying a home and investing in a property is best since you will be building wealth and equity in the form of mortgage payments. Of course, location of the property, your current financial status, and other extenuating circumstances play a big part in deciding on whether to rent or buy. As with any financial decision, all of the options and circumstances need to be weighed before jumping in. Making a major purchase requires doing your homework. According to an ohio.com article, the following are some reasons why renting can be more beneficial than buying.
- You Are Still Young: The National Association of Realtors states the typical first-time homebuyer is 31-years-old. People who are younger than that and uncertain about their futures should not feel pressured into buying simply because it is presumed to be the “adult” thing to do. Renting and feeling your financial way, which can include seeing how a job pans out or where your budget lies after paying off debts, might make more financial sense than buying.
- The Price-to-Rent Ratio is too High: Buying may seem like a wise idea, but it could be causing you to spend more than necessary, particularly if you check the price-to-rent ratio and find homes in your area are not fairly priced. Figuring a P/R ratio includes finding two similar houses (or condos or apartments) where one is for sale and the other is for rent. Divide the sale price of the first place by the annual rent for the second. The end result is the P/R ratio. So if a home sells for $300,000, and there is a house around the corner renting for $1,200 a month, divide $300,000 by $14,400 (the annual cost of renting). The ratio would be 20.8. A rent ratio above 20 means the cost of home ownership will exceed the cost of renting. The higher the P/R ratio, the more sense it makes to rent instead of buy.
- Home Prices in Your Area Continue to Rise: Some people find themselves being priced out of certain neighborhoods or cities. Wages have not recovered from the Great Recession as quickly as home prices have, and some people may need to rent out of necessity. Until there is a greater supply of homes in your area, you may continue to get priced out of the market.
- You Don’t Meet the Buying Criteria: Don’t buy a home based on market conditions or pressure from others. Instead, buy when you’re financially ready. This means being out of debt; having between three and six months of expenses in an emergency fund; enough cash for a 10 to 20 percent down payment on a fixed mortgage; and when your mortgage payment will be no more than 25 percent of your monthly take-home pay.