To buy or rent a house is a frustrating question to answer, but it is an important decision to take.
Plenty of people seems to think that buying is better than renting because the monthly bill you pay, adds to your assets and not into your landlord’s pocket.
It is easy to succumb to the pressure from your parents, suggesting that home ownership is a great investment. But you have to be wise before you jump into it. Signing a purchase agreement, isn’t always the best idea. Sometimes, renting is a wiser choice.
To help, here are the factors to consider when looking for a place to live:
Price-to-Rent Ratio
It is so easy to compare a rent against your mortgage but there are other bills you need to pay when you buy a house. One useful tool to check whether it makes sense to buy or rent is through the price-to-rent ratio.
To calculate, pick two similar properties, one is for rent and the other for sale. Divide the price by the yearly rent and you have the ratio. David Leonhardt of Business Time say that a P/R ratio above 20 means, buying the property is much expensive than renting. In other words, sticking with a rental property in your area is smarter.
Proximity to Work
A lovely neighborhood far from the business district is a satisfying place to live. But after driving from home to work everyday, you’ll realize that waking up early, traffic and long travel time are some of the reasons you should have stuck with an apartment near the office. Also consider the proximity to major establishments, like hospitals and retail stores.
Stability of Work
Buying a house without a stable job makes no sense. Make sure you have enough income to pay for the mortgage. Plus, there are interests, repairs, closing costs and other extra fees that might overwhelm you in a long run. If you are unsure of your employment, it is better to rent and save money for emergency funds and future living expenses.
Lifestyle and Expenses
It is easy to say you will change your lifestyle to afford a house, but habits are hard to break. You will only increase the risk of foreclosure if you keep on living beyond your means. If you badly want to own a house, be dedicated in paying for it. This means, you need a secure source of income, and a minimalist lifestyle. If not, a rental property is your best option.
Plans About Life and Career
Are you planning to marry and settle down in three to five years from now? Are you thinking of leaving your work behind and travel the world? The future is vague that is why it makes buying or renting a house a more difficult question to answer. But you need a long-term perspective to see the bigger picture.
Look at what you want to achieve five to ten years from now, with your plans you can decide. Evelyn Zohlen, a certified financial planner and president of Inspired Financial in California, suggests that if you plan to stay in a house for at least five years, you are likely to regain the money you paid for the property and may generate a return on investment and equity after selling it- something you cannot do with rental properties.
Remember renting is best for short-term plans while buying is long-term. Analyze the market, your income, and lifestyle, and if you think you can afford a house, take it. If not, you can always enjoy the freedom you get from renting and save money for other investments.
What are your thoughts about buying or renting a house?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.