Your Money Coach
Cherryl Hanson Simpson
Buying vs. Renting a Home “I’ll be forty years old this year, and all my friends keep encouraging me to buy my own home before it’s too late. I’m very comfortable with my rented property and I really don’t want to spend a lot of money buying a house. Am I making a financial mistake by continuing to rent instead of buying?” The biggest financial dream of most persons is to own their own home. However, an increasing number of people are opting out of home ownership, even though they may be able to afford to buy. Is purchasing your own home the great financial benefit that it’s always portrayed? Or could it be more profitable to put your cash in other forms of investments? There is no one answer that will suit every person. Buying a home is a significant investment of time and money, and you will need to consider the pros and cons of renting versus buying, in order to decide what’s best for you.
2. Real estate can be a profitable investment
Advantages of buying
If you take out a mortgage to pay for your house, the payments are usually fixed over the lifetime of the loan. This allows you to realistically budget your annual cost. Also in respect of inflation, the real value of your payments will decrease over the years.
1. It’s all yours. Owning your own place gives you increased flexibility to do whatever you desire with your property, without restrictions from a landlord.
As the saying goes “Land can’t rotten.” Owning a home can be a long term investment that provides higher average returns than investing in money market instruments or even the stock market. 3. Mortgage payments are fixed
4. Real estate can be an illiquid investment. Selling your property can be a time consuming process. If you need to get back cash from this investment, it could take several months or even years. Advantages of Renting 1. It doesn’t require much initial expenditure You don’t need a large down payment- usually only one to two months’ rent is required as a security deposit. You can also invest your lump sum in other ways that can bring faster returns. 2. It’s usually cheaper to rent than to pay mortgage 4. You can borrow against the equity in your home Your property can increase your net worth and give you collateral to access financing for other projects. Disadvantages of buying 1. It requires a substantial financial outlay. Many people wipe out all their cash for the down payment and are left with no emergency funds for short term expenses. 2. The monthly costs can be higher. Mortgage payments can be more than your monthly rent. You should also factor in costs for property taxes, maintenance, security and insurance in the total cost of the home.
Many times the monthly rental is less than what you would have to pay for mortgage. This is especially so for established properties where the landlord may have a lower mortgage cost, or finished paying mortgage. 3. You’re not responsible for upkeep. Repairs and maintenance are costs to the landlord. Some landlords may ask you to fix and deduct from your rent. 4. You can move at any time. You don’t have to wait on the tedious process of selling in order to move location. If the value of the neighbourhood has declined, you also don’t have to face the possibility of loss of value of your investment. Disadvantages of Renting
3. Missed payments can mean losing your home.
1. You’re probably paying someone else’s mortgage.
Mortgage companies have very strict policies on late payments. If you run into financial difficulties your property could be foreclosed within a few months.
If you continue to rent, your money is going to help some one else own the property, and you’ll never build up any equity. 2. Home security is low.
The possibility of rent increases or the landlord asking you to leave can lead to insecurity about your home, especially if you have a family to consider. 3. You miss out on an investment that can bring long term gains. Real estate can provide financial security and the possibility of retirement rental income in the future. 4. Property values can increase out of your reach. The longer you wait to purchase real estate, the more expensive it will be to afford the down payment and mortgage costs. If you have decided if home ownership is right for you, you’ll need to consider if you can really afford it. Next week we’ll show you how to decide if you’re financially capable of buying a home now. Copyright ©Cherryl Hanson Simpson Cherryl is a financial consultant and coach, and the founder of Financially S.M.A.R.T. Services, Jamaica’s number one source for practical, down-toearth and independent answers for all questions relating to personal finance. Cherryl is currently writing her first book, The 3 Ms of Money.