Sunday, November 29th, 2015

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For Sale or for Rent? How do you choose?

One of the most exciting things about joining the so-called real world is getting a place of your own. There are tons of choices you get to make–will you live with room mates?  What part of the country will you live?  Do you need 24/7 access to a good takeout restaurant, or do you prefer lots of green space? 

The most important decision you will have to make is whether to rent or buy a place.  There’s no litmus test to tell you whether renting or buying makes the most sense for you. So you’ll need to take a close look at your personal financial situation and your long range plans before making any decisions.

Benefits of renting

Renting is how a lot of us start out–and there are plenty of advantages. Alli Saari, 23, Minneapolis, Minn., lived at home for a year after she graduated from college to save money and take her time deciding what kind of living was right for her. 

"Freedom is one of the biggest reasons I think young people choose to rent," says Saari.  "Many recent grads don’t have a clearly identified career path in mind.  When you rent, you can pick up and move."  You can choose your lease terms and once your lease is up, you’re off the hook.   

Another reason Saari chose to rent?  Location.  Saari did her research and was able to rent an apartment in the neighborhood where she wanted to live, couldn’t afford to buy a place in the same neighborhood.  "Location is key at this time of your life," says Saari.   

Another advantage of renting your digs—maintenance or repair work is done by your landlord or management company—meaning the tenant isn’t responsible for making repairs when the heater stops working at 3 a.m. This is good for two reasons: you aren’t paying for costly repairs, and contacting your landlord is often the only work you’ll have to do.   

Many apartment or rental properties offer additional amenities you couldn’t afford if you were buying a place. Perks like a common-party room, a pool, and a workout facility are just some of the amenities found in some rentals you’d likely have to forgo if you’re looking to buy a place. 

"I feel like there’s a sense of community in an apartment building," says Saari.  It’s a great way to meet people, especially if you choose a building with a lot of people close to your age. 

And finally–monthly cost.  When renting an apartment, your monthly costs are fixed, and are usually lower than buying.  Renters usually pay rent, utilities, and renter’s insurance for the lease term, and the management company–not you–will have to absorb unexpected costs. Of course, your rent can still go up once your lease is up for renewal.  


Benefits of buying

Chances are buying a place of your own is on your radar for sometime in the future, but how do you decide if buying is right for you now? Meredith Persha, 24, St. Louis Park, Minn., lived in an apartment for a year out of school, but after she got her first raise, her rent increased and she decided it was time to start looking into buying a place of her own.

"I had a sizeable down payment from investments I made as a kid.  This lowered my monthly mortgage payment so it was actually cheaper to buy than to continue to rent," says Persha.   

Before you even consider buying your own place—ask yourself these questions:

• Have I been in a job I like for at least a year?
• Do I have a stable income?
• Do I know where I want to live for the next 3-5 years? 

If you answered yes to these questions, you are ready to start looking into buying. Why? Because having a stable income from a job you like and are ready to settle in one place for a few years means you’re ready.

Karen Introcaso, Vice President of Lending and Operations of Spectrum Federal Credit Union in San Francisco says you need to have a stable lifestyle before considering buying.  “Make sure your feet are planted in a good job in the city you want to live,” she says.

A big benefit of buying?  Recouping some of the money you’ve paid toward your mortgage.  How it works: A mortgage payment has two major components—paying back the money you borrowed (the principal), and the interest you pay in order to borrow money from a financial institution.  The interest is a sunk cost that you can’t get back, but if you sell your place—hopefully for as much or more as you paid for it—you’ll get your principal back. 

You’ve probably heard someone say, “renting is throwing your money away each month.”  What they mean is that when you rent, your monthly payment goes to your landlord. It’s not really thrown away—it paid for a roof over your head for a month, but unlike buying, you won’t see that money again.

Introcaso, says that overall, buying is a great investment, but you have to be smart. “Educate yourselves on mortgage loans and the true cost of owning,” she says. “Many credit unions offer seminars that can teach you a lot about buying a home.”   

Buying not only has long-term financial benefits, but in the short term, you also get tax breaks as a homeowner that renters can’t enjoy. 

The biggest tax break you’ll see is writing off the interest you pay on your mortgage each month.  In the first few years of ownership, interest makes up a large chunk of your monthly payments, which can add up to thousands of dollars each year. 

Another financial benefit of buying vs. renting–building equity as home values rise.  What exactly does that mean?  Say you buy a place for $250,000 today, and in five years the value has risen to $300,000.  Let’s also say you’ve paid $20,000 towards the principal on your mortgage during those five years.  You don’t owe any more money to the lender just because your house is worth more than the purchase price five years ago.  The difference between what you owe on the principal of your mortgage and what the home is worth is called equity—in this case equity is $70,000.  You can use equity to take out a home equity loan, which is a whole other topic [http://www.fool.com/personal-finance/home/home-equity-101.aspx] entirely. 
Persha also had her own reasons for wanting to buy. "In an apartment building, I still felt like I was in college.  I wanted more responsibility, and when you own a place, you have to do everything yourself." 

Persha settled on a town home vs. a single family home or a condo.  With a town home or condo, maintenance work may be paid for through association dues, so it’s less work for you. Persha didn’t want to take on all the responsibility of a single family home just yet. "Owning a home is more work than I expected, but I’m still really happy with my decision," remarks Persha.

Buying does require a more stable lifestyle than renting does—Introcaso suggests you plan to stay in a place you purchase for three to five years in order to maximize your chance at a profit. “It’s all about the luck of the market,” she says. While homes are usually a good investment, it’s important to remember that homes are just that—an investment, which means you are taking on some risk.

Buying Considerations

If you’re seriously considering buying a place of your own, here are just a few of the things to keep in mind:

• Always get pre-qualified at your credit union to see what you can afford.  A big benefit of banking at a credit union is that they look out for your interest, as they aren’t in business to make money.  “I won’t approve a loan just so someone can have a house,” says Introcaso.  You have to be sure you can truly afford owning a place.
• Look beyond your monthly P&I (principal and interest) payment.  Homeowner’s insurance, real estate taxes, repairs, redecorating…the true cost of owning is much more than your monthly payment.
• Don’t dump all your savings into a home—you’ll want to keep enough for at least six months worth of living expenses should you lose your job or incur an unexpected costly expense.
• Always think about resale. You’re unlikely to stay in your first home forever, so buying smart your first time will help you to make money when it comes time to sell. “Don’t ‘just deal’ with something you don’t like,” says Persha. If something doesn’t feel right to you, chances are it will be unattractive to a potential buyer in the future. For example: buying a two bedroom condo with only one parking space might not seem like a big deal if you’re able to “make it work”, but the inconvenience would likely be a strike against your property for a potential buyer.
• If you’re looking at a town home or condo, don’t forget to add monthly association dues into your housing budget. (Generally, these can range from $100 to $500 dollars per month.) Dig deep and find out exactly what the dues cover.  You don’t want to end up paying several hundred a month in dues, only to find out you’re responsible for costly hail damage to your roof.
• Before you buy, take a trip down to city hall to see what the future plans are for your potential new neighborhood, especially if you’re purchasing new construction. Persha researched her neighborhood before buying her town home, and was glad she did. “Then I knew they would be constructing a new shopping center or expanding a road in my backyard.”

There are all kinds of mortgages and several options that vary by state and location you can choose from—to find out if you are an eligible candidate for buying a house, contact the mortgage loan officer at your credit union. He or she will be happy to review your current financial status with you to determine if you are a good candidate to buy your own place.

Whatever you choose, take the time to think your decision over.  Don’t jump into anything–renting or buying– too fast.  There will always be another ‘perfect’ place.  "Take a step back and look at all your cards," says Saari.  You’ll want to spend the time and effort to make the right decision for you.

Ready to buy a house? Visit Young Money’s Mortgage Resources

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