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Buy vs Rent: How to Make the Big Decision

August 28, 2014 | By

Jeff Daddio thinks buying a home was one of the best financial decisions he ever made.

“The No. 1 reason I bought is I couldn’t take the idea of paying rent and not having money working for me in some way,” says the 27-year-old, who purchased a home with his wife in South Boston, MA last year. The couple is paying less each month for the mortgage than they would be for rent, while building equity.

“For me, this isn’t my white picket fence home, it’s an investment,” he says. “But I’m working toward owning my ideal home.”

While Daddio calculated that ownership represented a good investment in his family’s future, it wasn’t a decision he took lightly. Others who have done a similar analysis based on their own circumstances have come to the opposite conclusion — deciding that renting makes more financial sense than buying. And sometimes, factors like the flexibility and convenience of renting can be more important than dollars and cents.

Kelly Smith considered buying an apartment in Manhattan’s West Village last year, but ultimately decided to wait for a better property. “For the prices of studios in the area, I couldn’t get what I wanted,” the 26-year-old says.

Any number of factors — both personal and financial — can influence your decision to buy or rent. “Choosing whether to buy or rent is a decision that requires balancing both lifestyle and financial considerations,” says Sarah Shahdad, a strategic planning analyst in Fannie Mae’s Economic and Strategic Research Group.

“The vast majority of people tell us that they think owning makes more sense, particularly when it comes to having control over their living space, among other benefits,” she says. “Usually, that control is accompanied by additional — and sometimes unexpected — effort and expense, so households ultimately need to decide what works best for them.”

Eight in 10 people viewed buying a home as a good financial decision in a survey released last year by the National Association of Realtors®, (NAR). That’s up from around seven in 10 in NAR’s survey from two years earlier.

Slightly more than half of renters who took part in the survey said they eventually want to buy a home, which was also up nearly 10 percentage points. In addition to being able to build equity, respondents said the main benefits of buying a home are a safe and stable environment for their family and the freedom to live where they want.

The vast majority of people who do end up buying a home are satisfied with their decision, with 71 percent of homeowners surveyed by Fannie Mae last year describing owning a property as a “very positive experience.”

About a third of renters who took part in Fannie Mae’s survey described their renting experience as “very positive,” as well, citing budget, stress and the state of the economy as factors. But a majority of renters said that owning ultimately makes more sense from an economic perspective, not to mention privacy and security considerations.

Still, former homeowners who participated in a recent survey by Apartments.com said that affordability and the flexibility to move were the biggest factors in their choice to rent.

“About half of renters tell us that their primary reason for renting now is affordability or preparing financially for homeownership, while just under a third say they rent for flexibility or less hassle and stress,” Shahdad says.

Everyone’s situation is different, but here are some things you may want to consider when deciding whether it makes more sense to buy or rent:

Financial Factors

To start, try comparing the cost of buying or renting in your area. While the economic crisis shifted the balance of affordability more in favor of owning and away from renting, that trend has started to reverse with the recovery of the housing market.

Homeownership was more financially attractive in 2012 than at any time since 1970. However, homes are now becoming increasingly less affordable, according to NAR’s Housing Affordability Index.

Yet, affordability varies greatly depending on where you live. There are plenty of online resources — such as Fannie Mae’s Know Your OptionsTM, as well as calculators created by NAR and The New York Times — that can help determine whether it’s more economical to buy or rent in a particular area.

“Each local housing market is unique and buy vs. rent calculators such as that of the New York Times can help with the financial comparison. It’s a good idea to see what’s out there to buy or rent within your budget, so you can get a clearer idea of what lifestyle benefits you can get relative to the upfront and ongoing costs you might have,” says Shahdad.

The passage of time tends to favor buying — if home prices and rents remain stable — since you can build equity as you pay off the mortgage.

So, if you intend to stay at the same residence for more than a few years and can afford the down payment, insurance and taxes, as well as the cost of maintenance and repairs, then buying might be the best option. NAR estimates that buying typically becomes cheaper than renting after eight years, although the time frame depends on where you live.

Lifestyle Considerations

There are many other factors to take into account beyond affordability, however. While owning a home may be a lifetime goal for many people, it also carries a lot of responsibility. Renters can turn to a landlord to repair or replace a furnace that blows out or an air conditioning system that fails, saving time and unexpected expenses.

When Luke Kauffman bought a home in Lancaster, PA in 2011, he didn’t think the roof would need major repairs within a couple years.

But he recently spent $8,000 to fix it. “The home inspector said [the roof] had five years left, but [it] really had three,” the 27-year-old says.

In addition to being able to pass on the repair bill to the landlord, renters can bypass property taxes, homeowners insurance and extra fees such as maintenance or homeowners association dues.

Yet, at the end of the day, the decision to buy property or rent will likely come down largely to where you are in life.

“I do see myself buying a property in the future,” says Smith. “However, I think it will be outside of the city, when I have a family and can settle down more.”

There’s no clear-cut formula in deciding whether to buy or rent. The trick is to understand the pluses and minuses, both from a financial and a lifestyle perspective, and then make the right decision for you.

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