Is it Better to Rent or to Buy a Home? by Stefan Pastor
The long-held belief that owning a home is central to achieving the American dream may be coming to an end. According to Harvard University’s Joint Center for Housing Studies, U.S. homeownership is continuing on a more-than-45-year decline, while the share of U.S. families that rent housing is increasing. This shift has been attributed to a decline in household income, increased financial debt and stricter lending practices. However, individuals pondering the decision to rent versus buy often consider a broader range of short-term and long-term issues. The following factors should be included in individuals’ assessments of whether it is better to rent than buy.
Short-Term Affordability. Buying a home today often requires that many individuals make an initial down payment of 20 percent or more to secure bank financing. As a result, homeownership may tie up a significant portion of one’s savings in one single asset. Conversely, renters may have the freedom to invest a down payment into a portfolio of multiple assets, such as stocks, bonds, mutual funds, so that potentially strong performance in one investment may offset the impact of poor performance in another. With a diversified portfolio, renters may be better able to update and rebalance their portfolios at any time to respond to market swings and to align with their changing individual goals, time horizons and comfort with risks.
Long-Term Affordability. Homeownership allows individuals to lock in a fixed monthly payment over the life of a mortgage and hopefully build equity in the home over that timeframe. When homeowners pay off a mortgage, they own the property and remove from monthly payments to the bank from their budgets. However, this does not eliminate homeowners’ responsibilities to pay for the continual upkeep and repair of their properties. Renters, on the other hand, must be prepared for the possibility that their rent will increase over time. Currently, consumers are faced with the conflicting fact that home prices throughout much of the U.S. have increased more than 30 percent since 2012, while rents are rising faster than wages.
On the affordability front, renters may not need to worry about the costs of regular maintenance to their homes, while homeowners typically will. Additionally, homeowners should be prepared to cover the costs of property taxes, insurance and mortgage interest, as well as expenses for sprucing up their home and paying closing costs when it is time for a sale. While homeowners may use tax credits to offset some of these costs, there is a risk that they will lose money on the deal, especially if they sell their properties during a down market or before they build any equity in the homes.
Mobility. Renting provides consumers with more ease and flexibility to move than with homeownership. If a homeowner loses a job or is presented with a better employment opportunity in another area, he or she must deal with the hassles of selling the home before moving. In an uncertain economy, a homeowner may not be able to make a profit on the sale due to a decrease in property value and the expenses of preparing the home for sale and closing costs. A mortgage is typically a 30-year commitment. Renting, on the other hand, may provide a flexible alternative, especially for upwardly mobile young workers who do not expect to stay in one place for more than five years.
The question of renting versus buying is one of the largest financial decisions consumers will make in their lifetimes. Unfortunately, there is no one-size-fits-all answer to the question. Rather, individuals should take the time to assess their current financial picture, crunch some numbers and forecast different scenarios for the unpredictable future. A financial advisor can help to guide individuals through all of the important factors they should consider before making an ultimate decision.
About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at (954) 712-8888 or via email email@example.com.
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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Stefan Pastor and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.