Many of us sometimes have a tough time deciding if we should rent or buy. The decision especially comes into play in a big way when talking about big ticket items. The two largest purchases most of us make are our homes and our automobiles. Sometimes the decision to rent or buy may seem obvious. But often it can be difficult to decide between the two options. Read on for some basic factors to consider.
Moving into a New Residence
Moving into a new home or apartment is usually a very exciting time. A new beginning of sorts. However sometimes the rent or buy decision is not clear. Following are some factors to consider in helping you to make that decision.
Do You Have Money For A Down Payment?
One of the key components in purchasing a home is making a down payment. A down payment is a general requirement to acquiring a mortgage loan. If you do not have the cash required, then buying is likely not an option for you at this time. Consider renting an inexpensive place or live with friends or family until you save up the required funds.
How Long Will You Live In The Home?
You may be looking for a temporary residence. It can be a job relocation for a temporary assignment. Sometimes you just want to live in an area before you make a long term commitment. In such a cases, it makes more sense to rent.
Closing costs when buying the home, and then commissions and more closing costs when selling, can make short term ownership an expensive choice. Not to mention the time it will take to list and sell the home. However, if you are confident you will be living in your residence for the long term, buying may make more sense.
Is the Real Estate Market On Fire?
The real estate market where you are looking to move may be extremely hot. This is called a seller’s market. Seller’s can usually get their asking price or more in such markets. So this is probably not the ideal market to get a good bargain price for your dream home. In such circumstances, it can pay to rent for a while until the market cools a bit.
Do You Enjoy Working on Your Home?
If you enjoy improving and maintaining your home, buying may be the better choice for you. You may make improvements or additions to the home over time. If you rent, you must get permission to make most types of changes. Even then, upon leaving, you will have nothing in return for your efforts.
On the other hand, if you don’t want to be bothered with cutting the grass, shoveling snow, and other typical homeowner tasks, then renting may be for you. Granted you can hire someone to do these chores, but if you own the home, they are ultimately your responsibility.
Are Interest Rates High or Low?
High interest rates may make borrowing money unaffordable. On the other hand, low mortgage rates can allow you to borrow more than you otherwise could comfortably afford. So interest rates can have a deciding effect on whether or not you should rent or buy.
Consider the Overall Costs of Each Option
With rent, you still have to put down a security deposit in addition to the monthly rent. In addition, you may have to spend for renter’s insurance, utilities, and minor repairs.
When you finance a home, you have to make a down payment and pay mortgage principal and interest every month. That is until you pay off your mortgage. You also have property and casualty insurance to pay for, as well as property taxes. Not to mention that you are also responsible for all maintenance and repairs.
However, one key advantage to owning a home has to do with tax savings. If you itemize, you are allowed a deduction for your mortgage interest and real estate tax payments. When you rent, you generally do not get any tax breaks.
Another thing to consider is the long term change in your costs. When you rent, the rent will likely gradually increase over time. With home ownership, your maintenance and repair costs, property taxes, and insurance may increase with inflation over time. But at least a major part of your costs, your mortgage interest and principal will stay constant over the life of the mortgage. That is if you use a fixed rate mortgage to finance the home. This can be a 15 or 30 year period.
Long Term Appreciation Potential
Real estate is the type of asset that generally appreciates over long periods of time. So residential property ownership can allow you to build equity over time through appreciation in value and the reduction and eventual payoff of your mortgage principal.
You can build equity sooner by negotiating a bargain purchase price and/or paying off your mortgage faster. Typical rental arrangements of a home or apartment do not allow you to benefit from long term appreciation and the build up of equity in the property.
Acquiring a New Automobile
So you’re about to head over to the dealer to get yourself that new car you’ve been eyeing. You get there and start talking to the salesperson. Soon you realize that there is more than one way to acquire the car you want. You basically have to decide if you want to rent or buy the car. Renting a car is typically referred to as leasing.
When you lease a vehicle, you don’t own it. As indicated above, you are essentially renting it. And when you purchase it, as with anything else, you acquire ownership. But how should you go about deciding if you should rent or buy?
Do You Need or Enjoy Driving A New Car?
Some of us just get bored with the same vehicle after a few years. It is a personal preference for many to obtain a new car every so often. It is not always just about maximum frugality. If you can comfortably afford it and it makes you feel good, positive, and inspired, then go for it. It may even be required based on your job.
For example, many realtors or other salespeople have to meet clients and drive them around as part of their job. As such, they need to present an image of success. Showing up in your 15 year old beat up car won’t cut it.
The Hassles and Expense of Repairs and Maintenance
But besides the preference or need for a new car, repairs can also be a deciding factor in your decision to rent or buy. Vehicles are the type of asset which generally depreciates over time. As they get older, they tend to need more repairs and maintenance. After three years (the typical lease term), repairs tend to become more and more frequent and expensive.
Brakes, tire rotation and replacement, major tune-ups, etc. And these are just the recurring items. A faulty alternator, muffler, transmission, air conditioner, or other major repairs can set you back quite a bit. If you happen to be good at and enjoy repairing and maintaining vehicles yourself, this may not be an issue.
But for many individuals, repairs and maintenance are inconvenient. First is the hassle of finding the time to bring the vehicle in for repairs. And then managing without the car until it is fixed. Most importantly, repairs can be expensive. Even relatively inexpensive smaller repairs and maintenance can add up quickly.
Are You Looking for Lower Monthly Payments?
The monthly payments for leasing a car are generally lower than the payments required to finance the purchase of the same car. Granted you may have to put down some money at lease signing every three years or so when you lease a new car. But you would likely also pay quite a bit more up front when financing a car. Factor that in with the lower repair and maintenance of a new vehicle, and the lease option can be quite attractive.
As the car ages, the additional maintenance and repair requirements may make purchasing more expensive than leasing over a longer time period as well. Not to mention that with leasing, you will always have a relatively new and more reliable car to drive.
Although it is possible to lease a used car from certain dealers, most leases are for new cars. And rightly so. If you do lease, do not lease a used car. A key benefit of leasing is that you get lower monthly payments, and avoid repairs and more costly maintenance requirements that come with older used cars.
How Much And How Carefully Do You Drive?
If you drive much more than about 12,000 to 15,000 miles per year, you may want to reconsider leasing. You will be charged a specified amount such as $.15 or $.25 for each mile which exceeds your allowable mileage lease limit. This can add up quickly.
Further, if you are not a careful driver you may also want to forget about leasing. If you return a leased car with more than just typical wear and tear on it, you will be charged for the damage. This can more than offset the otherwise potentially lower cost of a lease.
Are You In Love With A Car’s Design?
Auto companies usually change the design of most models every couple of years or so. So if you’ve fallen in love with a car’s design, you may wish to purchase it. Just be prepared for the eventual hassle and cost of repairs and maintenance that come with owning an older vehicle.
However, it may still make more sense to lease the vehicle first. This way, if that particular car turns out to be a lemon, you can return it when the lease expires. If you still want to purchase it, you can do so after the lease expires.
Rent or Buy A New Car? Maybe Neither
Driving a car costs money. Whether you rent or buy, new or old. Besides leasing or financing costs, you have the costs of gasoline, insurance, and registration. Not to mention any required repairs and maintenance.
So sometimes the ultimate best decision may be to do without a car. At least until you can afford one. Or if you are married, for example, maybe you can try and manage with one car for your household instead of two or more. Mass transit, car pooling, or riding a bike may also be options for some.
Also, if you do not have good enough credit, you may not be able to lease or finance the purchase of a new car anyway. At the very least, bad credit can make leasing or financing unaffordable options.
If you can’t finance or lease a new car, buying a used car may be another option. But as indicated above, repairs and maintenance can potentially turn an older car into a money pit. Not to mention that you may end up with a relatively unreliable, older looking, and less comfortable car.
Used cars which are only a few years old are generally sold by dealers as well as individuals. The prices for some newer used cars may still be relatively high though. This may still require you to obtain financing.
So a better move may be to buy a less expensive used car for a cash price that you can afford without having to borrow money. This way, you don’t have repair and maintenance payments on top of car loan payments. Sometimes if you can buy at a bargain price, and luck out a bit on major repairs, this can be a worthwhile move.
Real estate is an asset that generally appreciates over time. As such, it generally pays to purchase it rather than be a tenant. You also get tax breaks for some of the costs of home ownership. However, there are cases when renting may make more sense.
If you do not have the financial means to get a loan or make a down payment, renting is likely better. Likewise, if you will be living in an area temporarily or don’t want to be bothered with repairs and maintenance, buying probably doesn’t make sense.
Unlike real estate, cars are assets that depreciate and lose value over time. The older they get, the more you have to spend to keep them running reliably. So with that in mind, you may not wish to purchase a vehicle, whether it’s financed or paid for in cash.
Likewise, if you want lower monthly payments (compared to financing), prefer driving a new car, or need to project an image, leasing may be for you. However, in some cases, you may be better off buying. If you drive excessively, aren’t careful, don’t mind repairs, or just can’t do without a particular design, then you may want to own it.
So will you rent or buy the next time you move or acquire a new car?