Buying Versus Renting Property

There are several benefits to homeownership that a person should consider when deciding whether to purchase a home or continue renting:

• Economics;
• Home equity;
• Repairs and maintenance;
• Employment stability;
• Alternatives to buying and renting.

What Are the Economic Considerations in Deciding Whether to Buy a Home?

One of the main economic advantages of home ownership is building equity. Most people finance their home purchase with a mortgage loan and an initial down payment. Every month, they make a mortgage payment. A portion of the mortgage payment goes to paying interest on the loan, but the other part goes to paying down the loan principal or the amount borrowed.

Every time a person pays down the loan principal, they build equity in the home. When they decide to sell the house, they will receive more money back than they paid as a down payment. They effectively own more of their home every month.

So, for example, a person may make a down payment of $20,000 to buy a house worth $100,000. They borrow and owe $80,000. If the person were to sell immediately after buying, they would get $20,000 from the sale, the return of their down payment, and probably nothing more.

But if they live in the house for several years and then sell it, they may get $30,000 in return because they paid the loan principal and built their home equity. Eventually, they pay off the loan and own their home outright at the end of the mortgage period. If they sell it, the full purchase price paid by the buyer goes to the seller.

Once a person owns a home, they no longer have to pay rent, mortgage, or mortgage interest. They have an asset that is likely to increase in value over time. This is advantageous when a person wants to retire and stop working.

What about Tax Deductions for Home Ownership?

There are tax deductions associated with home ownership. Specifically, a percentage of the amount a person pays for mortgage interest every year can be deducted. In addition, the real estate property taxes a person pays are deductible up to a value of $10,000 on their income tax return. The mortgage interest and property tax deductions are only available if a person itemizes deductions on their tax return. Many people take the standard deduction. A person would not want to take the deduction for mortgage interest if it is not more than the value of the standard deduction.

Also, a person can get a home equity loan, and if they use it to purchase, construct, or improve their home, the interest they pay on this loan is also tax deductible.

Currently, there is a housing shortage in the U.S., which is unlikely to change. So, while there may be downward pressure on home values, they are unlikely to drop significantly. Over time, the value of real property increases, and it is certainly competitive with other investments.

What about Repairs and Maintenance?

While a person rents a house or apartment, the landlord is generally responsible for all maintenance and repairs inside and outside the rental unit. However, once a person owns a home or condominium, the place is theirs. Both maintenance and repairs become their sole responsibility.

A person should ensure they have money available after their home purchase just in case repairs are needed. They must also consider whether they will have the money to fund routine maintenance and necessary repairs.

For example, before a person buys a house, they want to find out how old the roof is, when they can expect to replace it, and how much that will cost. They want to know how old the heating unit is, how long it will last, and how much it costs to replace it.

A person also wants to consider the exterior of the home. Tree work can cost thousands of dollars. A person should look at the yard and consider whether trees must be trimmed or removed. They want to look at fencing and think about the kind of maintenance it may require and what the replacement cost could be. They should consider whether they want to engage in the upkeep of a lawn or would prefer to hire a landscaper and, if so, how much that costs.

Of course, there are alternatives to a single-family residence with a yard. A person might prefer a condominium unit in a community with a homeowners association (HOA). The HOA might be responsible for the landscaping, exterior maintenance, and repair of the structures. A person might find that a condominium or townhouse in a community with an HOA would work better for them, their pocketbook, and their lifestyle.

Of course, a condo or townhouse owner who lives in a community with an HOA has to pay a monthly fee for the services the HOA provides, and these fees are not tax deductible.

There are many advantages to homeownership. There are costs as well, and they can be significant. However, some problems can be avoided by buying smartly and researching before making the down payment.

How Does My Employment Affect My Choice?

Most experts say people should not buy a house unless they know they will live in it for at least 5 years. It does not make sense financially because there are costs to buying a house.

So, if a person knows that they want to relocate within the next five years or thinks there is a possibility that their employer may want them to move within five years, then they probably want to wait until their situation is more stable for the long term.

Also, those considering homeowners want to ensure secure employment. If a person thinks they could lose their job or otherwise do not know their employment is secure, they may want to wait until their situation is more stable.

Of course, a person needs to know that their salary is enough to cover the mortgage payment and other expenses. Some experts advise only buying as much house as a person can afford on one spouse’s salary if a couple is married and buying a family residence together. That way, if one of them loses their job, they also do not risk losing their home.

If a person winds up short on funds due to lack of employment and has to sell after a short period of ownership, their investment will most likely not pay off. Or, if a person defaults on their mortgage and the home goes into foreclosure, it can have a heavily negative effect on their credit score.

Homeownership can be very advantageous, but only if a person buys a home they can truly afford at a time when they can make home buying work for them.

Are There Any Alternatives to Buying or Renting?

There are a few good alternatives to purchasing or renting a home. They often work for a person who does not have excellent credit or enough money saved for the down payment required by a commercial lender. The options are as follows:

• Seller Financing: Some sellers might be willing to lend money to a buyer to buy their house. This way, a person avoids applying for credit from a bank, credit union, or other lending institution. A seller might be more flexible about the loan terms than a commercial business. The seller determines the interest rate, but it could save a person a lot of money. They might also create options that a buyer might not have otherwise;
• Lease with Option to Buy: The buyer pays the seller option money in exchange for the right to buy the property after a certain period, e.g., a year. The buyer also agrees to lease the property from the seller for a rental amount on which they agree during the term of the lease option agreement, usually from 1 to 3 years.
  • The option money generally does not apply to the down payment, but a portion of the monthly rental payment might be applied to the property’s purchase price. The buyer-lessee has the exclusive right to buy the property during the lease option period. If the buyer-lessee does not exercise the option and buy the property at the end of the term, the option expires. The buyer is not obligated to buy the property, and the buyer-lessee can be evicted for failure to pay rent during the lease period;
• Contract for a Deed: In this transaction, the buyer and seller enter into a contract of sale of the seller’s property. An escrow agent collects payments from the buyer for the seller over a specified period. At the end of the period, the buyer receives the deed to the property. It can reduce the buyer’s costs, but the buyer is essentially a tenant and may be evicted until the purchase price is paid.

Do I Need the Help of a Lawyer for Buying or Renting Property?

Whether you buy or lease residential property for your primary residence, a real estate lawyer can greatly help. Any real estate transaction should involve a written contract, e.g., a lease or purchase contract.

Especially if you are going for one of the less traditional options, e.g., a lease with the option to buy, you want a real estate lawyer to either review contracts that the seller may have offered you or draft a contract for you to present to the seller. You want to be sure that any contract you sign protects your rights and interests in the transaction.