Wednesday, December 14, 2011
Should You Purchase or Rent?
There are many factors to be considered when deciding to move to a new location with the first critical decision being whether to purchase some property or rent. Depending upon your circumstances, it may either be a clear-cut decision or one that requires a more thorough analysis to make that determination.
Factors to Consider
Career - For some individuals, it may not be practical to purchase property if their career will require them to relocate frequently. Although some people have the resources and inclination to accumulate property each time they move, for most of us that is either not an option or would be an undesirable outcome to find ourselves in the role of landlord. For the majority of us, that means we need to sell property each time we move, so careful analysis is required to determine whether it is better to buy or rent property for the duration of the assignment. One item to consider is that it generally takes 3 - 5 years under average real estate market conditions to reach the breakeven point for recouping the closing costs incurred at the time of purchase. Individual situations will vary, but in a stagnant real estate market it will take longer to realize enough in property appreciation to cover the transaction costs related to acquiring and selling property.
Property Resale - Not all properties or real estate markets are equal when it comes time to sell property. Factors to weigh include the typical length of time it takes to sell property in your area or the area you are interested in which you are interested, and if there is something unique about the property (price range, location, size) that you are interested in that would make it either easier or harder to sell. Whether or not you have relocation benefits available to you through an employer if you are unable to sell your property may also be a factor.
Finances - The purchase of property typically involves significant upfront cash outlays: pre-purchase inspections, a down payment and closing costs. Equally important is whether or not sufficient income is available to cover the mortgage/escrow payments while still having enough income to adequately take care of other living expenses, car payments as well as saving for retirement. The lack of sufficient funds may quickly eliminate any thought of purchasing property and dictate that in the interim renting, living with family members or some other living arrangement will be required until enough funds can be saved.
Relationship Status - Personal relationships can play an important part in deciding to purchase property. Engaged or newly married couples often are looking to establish a single common property on which to build their future together. Single or newly divorced adults may not be ready or interested in making a long-term obligation to a specific location and prefer to leave their options open as they pursue relationships, careers, other interests and hobbies.
Personal Preference - While some people feel a strong need to own property, others don't want the responsibility of maintaining property and prefer to simply pick up the phone at the first sign of any possible trouble and have someone else be responsible for remedying the issue at hand.
Benefits of Purchasing a Home
Ownership - For most people, owning their home is a key element of attaining the American Dream. And there is nothing quite like buying your first home and realizing it is all yours (provided of course that you continue to make your mortgage payments on time). Homeowners also tend to view their purchase an investment and have incentive to keep their property in good repair.
Building Equity - Obviously the largest benefit is that you are now building equity in your own property instead of contributing to the equity in someone else's property via rent payments. Historically, home ownership has been a long-standing means of building long-term wealth.
Decorating Without Limitations - As an owner, you have the freedom to personalize your property to your heart's content, subject only to local code and any applicable Homeowners' Association rules, unlike when you rent and experience many restrictions as to what you can and cannot do to the rental property. No need to get approval to paint interior walls, change flooring, install custom closet organizers, or complete minor home improvement projects. Although larger remodel projects may require getting permits, other than meeting code requirements, you are limited only by your budget and creativity when making changes to reflect your personal tastes and style.
Financial Stability - Fixed rate mortgages result in both greater financial stability and predictability. Assuming a fixed-rate mortgage, over time your housing costs should become a smaller percentage of your monthly budget as your income continues to grow while the mortgage remains constant. Additionally, fixed mortgages offer a great deal of predictability when preparing long-term budgets. Although repairs and maintenance will need to be factored in, there will be no surprises with unexpected hikes in rent.
Personal Benefits - Owning property frequently allows you a greater opportunity to meet neighbors and develop friendships with others that hold values similar to your own. And unlike apartment dwellers that tend to be more nomadic and view their unit as just a place to sleep at night, homeowner's tend to move less often and view their homes as investments. It is also not uncommon to find neighbors that were drawn to the area for many of the same reasons that caught your attention - good reputation of schools, easy access to public transportation, close proximity to outdoor activities, the architecture of the homes, or the availability of shopping, dining and entertainment within walking distance - giving you something in common right from the beginning to build upon.
Limited Commitment - Perhaps one of the greatest benefits of renting is the limited commitment that is required of tenants allowing, them more flexibility to relocate as circumstances change. Leases often only require an initial six-month or one-year term, allowing a lot of flexibility for tenants. At worse case, if something unexpected comes up and you need to move before the initial lease is up you are frequently out a deposit for breaking the contract, but you don't need to sell a house before you can move or to free up your cash.
Repairs and Maintenance - In many circumstances, a tenant needs only to contact the property owner or manager to have repairs taken care of. And for those who don't have the time or inclination to keep up a yard, renting a property where the upkeep is taken care of can be a real plus.
Roommates - Many people choose to have roommates to help defray housing costs by splitting the cost of rent as well as utilities. Although this tends to appeal more to young adults, it is not limited exclusively to the younger crowd. As the economy has created new challenges, some homeowners have begun seeking roommates to ease financial burdens by filling empty rooms in their homes.