Buying vs. Renting

The line between buying and renting can often be a fine one for people just starting out and wondering which is right for them. The benefits of buying and the attractive prospect of having equity in new real estate often weigh against the less restrictive nature of renting and the deferred responsibility of home repairs through renting. Making the decision can depend on a variety of factors, but the biggest among them is the general real estate appreciation seen in the area and the time you plan to be on the property.

Buying vs. Renting

Market appreciation can be a difficult figure to tie down regarding a particular area. A considerable amount of data and time is needed to properly do homework on the expected appreciation of a certain home. We have all heard stories about booming areas that have flattened out and depreciating areas turning around economic fortune.

The 10% Rule
Real estate appreciation plays a key part in the difference between buying and renting. A quick and dirty rule of thumb states that the cost of buying and then subsequently selling your home is about 10 percent of the purchase price of your home. That 10 percent encompasses things like closing fees, realtor commissions, and other associated costs. That 10 percent markup is something that needs to be made up for in the real estate appreciation of the value of the home. If a particular area does not appreciate that amount, you probably will not make up the difference.

Length of Ownership
That rule plays into the second strong factor in deciding whether to buy or rent: the length of time you plan to stay in a particular town or home. If you need to see that 10 percent appreciation to just break even on the transaction costs of buying and selling your home, staying in the home for only a short while does not give the real estate market in a particular area much time to appreciate. The longer you stay in a home, the greater its odds of appreciating in value, ensuring that you not only cover that 10 percent but then have built up equity in the home as well.

Equity vs Interest as a Factor
Though some people think that equity is an automatic feature of buying any home, that is not universally true and that comes down to time spent living in a home as well. When you buy, you pledge to pay not only the purchase price of the home but the interest payments on your mortgage as well. Over the first few years of payments, much of what you will be paying goes towards that interest amount and little goes towards paying down the principal, the purchase price of your home.

Renting has Advantages
For those people that only plan to be in a particular area for a few years or even shorter, buying a home does not often make sense when renting offers the ability to perhaps pay less and escape some financial obligations on things like repairs and particular utilities, depending on your renting agreement.

Cost of Area
Of course, the cost of the area also plays a big part in the buying or renting decision. In some areas, you may be able to purchase a particular home and pay $1,400 for your mortgage payment, taxes, and associated fees for a property that might otherwise rent for $800 or so. While it is by no means suggested that cost is not an important factor by not including it in the two biggest factors contributing toward a buy or sell decision, time spent in a particular property can erase many of the cost fluctuations seen in a short-term stay at a property. Time spent in a property can often render these kinds of early cost distinctions moot over the long term.

An exception to Every Rule
Of course, there will always be exceptions to every rule and your situation is unique to you. If you have buying or selling concerns during the home-buying process, consult a realtor or other real estate authority that can shed some light on the exact financial situation you are looking at in either situation.  It is important that you feel comfortable with your decision to buy or rent, so do the best homework possible to ensure a strong, confident decision.

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