a Renting home is better than buying a home
Jeffrey Douglas
Com/156
10/09/2011
Virginia Fontana
When it comes to the choice of renting or buying a place to live, people need to be able to
understand the good and bad of both. Even with tax benefits with home ownership, renting is
better than buying a home since it can take six years or more for home ownership to be cheaper
than renting. Renting allows moving to be much easier that home ownership. Location can be a
big factor that needs to look at in deciding which chose is better. Other factor needs to be check
when deciding the best choice.
Home ownership can take up to six or more years to make it cheaper than renting. The
initial cost of renting vs. buying can be a huge difference. When a person is renting, the initial
cost comes to the first months rent and the deposit. Sometimes the property owner will want the
last month rent too. When a person is going to buy, they are going to need to come up with a
down payment. The ideal down payment is 20% of the cost of the home. The buyer has to pay
their part of the closing cost. The down payment of a $172,000 is $34,400 with a closing cost of
$6,880 for a grand total of $41,280. The initial cost of renting a $1,100 home the first months
rent of $1,100 and a deposit of $1,100 for a grand total of $2,200 for an initial saving of $39,080.
The potential buyer will need to look at the yearly cost of buying a home. The individual
has to look at the cost of the mortgage payment, property taxes, utilities, renovations,
maintenance, and homeowners insurance. When the individual looks at the cost of renting, they
need to look at monthly rent, renters insurance and utilities. Adding up all the cost of both the
total comes to $14,250 for buying a home and $14,727 for renting. The individual then needs to
add the initial cost into the yearly cost. The first year of home ownership comes to $55,530,
compare that to the initial cost of renting which comes to $15,827. Just in the first year, the first
year savings from renting is $39,703. Even when the individual adds in a yearly increase of
renting of 3%, the first 6-year cost of rent is $72,383. Then the individual cost of utilities of
$1,325 per year, the renters insurance cost of $202 per year. This makes the initial cost over 6
years coming to $81,545. When a potential buy looks at the six-year cost of home ownership
they need to add up the yearly cost of property taxes of $2,092, utilities of $1,325, renovations of
$968, maintenance of $968, homeowners insurance of $891 and the initial cost. The six year
cost of home ownership is only $78,744. The individual only saves $2,801 when buying a home
instead of renting a home. (Quealy,n.d)
In some cities in the U.S.A it is cheaper to rent then it is to buy a home. Christie (2011)
By some estimates, housing in Seattle is as much as 80% more expensive than it would be
otherwise. Prices rose sharply during the boom and have fallen moderately hard since then, down
about 25%, according to the S&P/Case-Shiller index. Individuals need to look at the price-rent
ratio when determining if renting is the best choice. According to "Real Estate
Bubble" (n.d), The price-rent ratio is the average cost of ownership divided by the received rent
income (if buying to let) or the estimated rent that would be paid if renting buying (if to
reside.)Some cities like Seattle have a price-rent ratio of 24, anything above 20 and the
individual would want to rent instead of buying.
Renting a home instead of buying the individual can move anytime their lease is up. The
renter is not forced to stay or wait for their place like someone that owns a house. This allows the
individuals to be able to follow the jobs when needed. When renting a home they are also free
from all the repairs on that home. That cost can be a huge savings. Renting a home does allow
the renter to avoid any drops in the market value. Renting can also protect against messing their
credit up from a foreclosure if they can no longer afford to pay anymore. Most of the time if the
renter has to break their lease they may just lose their deposit. Sometime the renter may have to
pay a break the lease fee. Paying the fee and losing the deposit is a small amount compared to the
amount the individual will lose in a foreclosure. Breaking the lease does not affect the renters
credit, like a foreclosure does to a home owner.
Homeowners are able to use some tax breaks to help reduce the annual cost of their
home. The biggest tax break is the mortgage interest. All the interest can be deducted every year
as long as the mortgage is less than $1 million. If the homeowner had to pay points in their
mortgage to receive a better rate that can also be a tax break. Property tax is a major deduction
that the homeowner can receive. When buying a home this years property taxes are divided
between the buyer and the seller. That percent is fully deductible. When the homeowner sells,
they use to have to use the sale proceeds to buy a new home. Instead the law was changed in
1997, which now allows up to $250,000 ($500,00 for married filers) in the increase value of the
home to be tax-free but the home owner has to have owned the property for two years and has
lived in the home for at least two of the last five years before the sale. Something the homeowner
will still have to pay the full cost. Insurance, property hazard insurance premiums, home
association dues, deprecation of the home, and closing cost are thing that the homeowner is not
able to write off in their income taxes.
Even with the loss of taxes right offs, there are still great benefits to renting instead of
buying. Just come up with the high initial cost of buying a home, it still is not an option for many
people. After the initial cost, just paying the maintenance cost may be too much for the
homeowner. Extra repairs may cost the homeowner thousands of dollars more a year. This cost
may be something that the homeowner may never have thought would have come up. Some of
the tax benefits the homeowner may not be able to use, if the cost of their home is over a certain
amount. After the individual looks at all the pros and cons of homeownership, they may find
renting is still the best option for them.
References
Christie, L. (2011). 12 cities : where to rent vs. buy. Retrieved from
http://money.cnn.com/galleries/2011/real_estate/1101/gallery.rent_or_buy/5.html
Real estate bubble. (n.d). Retrieved from
http://en.wikipedia.org/wiki/Real_estate_bubble#Housing_ownership_and_rent_measures
Quealy, K. (n.d). Is it better to buy or rent. Retrieved from
http://www.nytimes.com/interactive/business/buy-rent-calculator.html