So you are considering moving and don’t know if you should you buy or rent in your new city? This article has been written to assist you further when answering the age-old question of should I buy or rent my home.
While it is certainly wise and essential for you to calculate the costs of both approaches, the numbers are not everything.
Before getting started, an important caveat is that it is difficult to explore or research a new area before actually moving there. Renting for a short amount of time – say six months – will give you time to get to know your new city and its surrounding neighbourhoods before making any firm commitments.
Home ownership is an important part of our culture and it has traditionally been seen as a hallmark of financial stability. But with today’s economic realities, does this adage still hold true? Only you can decide for certain.
Now, let’s take a look at some important questions to ask ourselves and take a few points under consideration before making this very big decision.
1. How long do you plan to live in the new residence?
While you can never know for sure how long you will be in the new city, the costs of purchasing a home can be significant – real estate agent commissions, taxes, lawyer fees, etc… A general rule of thumb to follow is to consider purchasing a home if you plan on being there for more than four years. Simply put, the longer you own a home, the lower the risk that you will lose on your original purchase price.
2. How secure is your employment in the new city?
The stability of your employment will be an important component in obtaining a mortgage in your new city. Also the income from your employment will help you establish a housing budget.
3. How much does your budget allow you to pay for housing?
Owning a home provides intrinsic rewards but there are also a lot of financial responsibilities associated with this choice. To answer the question of how much you can afford, you need to preparea detailed monthly household budget.When considering the obvious costs such as mortgage, property taxes and insurance, don’t forget less obvious expenses such as furniture, heat, electricity, lawn care, and maintenance such as roof, windows, siding, painting, and your own personal time to take care of such things. Also, when working on your budget, be sure to leave a bit of room for some saving. Whenpurchasing a home it’s important to have some money set aside for “emergencies”.
4. Does your personal financial situation set you up for success?
Beyond your housing budget and employment situation, you want to obtain the lowest cost mortgage possible. Doing so will be influenced by a past history of bad credit. If this is your situation, you may want to improve your credit history before purchasing a home. Also, the size of your down payment will influence the mortgage you are able to obtain. In some instances, it may be wiser to build-up equity before making the move to purchase a home.
5. Don’t assume that your new house will appreciate in value.
While it is generally a reasonable assumption that your house will increase in value, it is never a given. Everyone has a different level of risk tolerance. If your new home does not appreciate in value as you had hoped, how are you going to react?
6. What do the employment figures look like I the area you are moving to?
If you will be moving to an area where there is job growth, the risks associated with investing in home ownership are lower. By contrast, if the area is experiencing difficult financial times, you would probably be better served by considering renting for a while to monitor the situation.
7. If for whatever reason, you need or want to move again, it is harder to sell a home than to leave a rental unit.
This is a bit of a subconscious point. If you are not satisfied with the appreciation of your home, you will be less likely to put it up for sale. Also, the costs associated with selling a home are typically higher than leaving a rental unit – home staging, real estate commissions, and any other closing costs.
8. Lastly, is the notion of home ownership important to you?
We started this article by stating that home ownership is an important component of our socio-cultural beliefs. While this is true, it is also highly personal choice. Another way of asking this question is, “how badly do you want to own a home?” Many people feel that home ownership is an essential part of who they are. If you are one of these people but your current budget is telling you otherwise, you may want to re-examine your budget. If you really want to buy that home, where can you make changes in your spending habits and are you prepared to live with those changes?
Cost of renting vs. buying
Let’s cover the financials of renting vs. purchasing. While there are financial calculators available on the web, below is an easy to follow exercise that will begin to give you a feel for how your financial reality plays into this game.
Let’s compare a rental versus the purchase of the same property. Our rental and purchase assumptions are:
- Monthly rent: $850
- Monthly utilities: $150
- Purchase price of the same property: $150,000
- 10% downpayment
- 30 year mortgage carrying a 5% interest rate
- Monthly property taxes: $100
- Monthly condo fees: $150
|Total Monthly Payments||$950||$1,120|
Simply looking at this example, one might assume there is very little difference between renting and purchasing. The reality is that this is only part of the story. Let’s look at the other costs associated with renting vs. purchasing.
- First, renters are not responsible for maintenance while homeowners are. A generally accepted rule of thumb for home maintenance costs is 2% of the home value per year. Based on our example of a $150,000 house, that would be an additional $250 per month (2% * 150,000 / 12).
- Next, you may recall from earlier in the article that there are additional one time costs associated with purchasing a home. These can include legal fees, land transfer taxes, and other miscellaneous expenses that you do not have to pay when you rent. Another generally acceptable rule of thumb is to assume that these costs can be around 5% of the purchase price.Based on our example that is an additional $7,500.
- Now let’s revisit the down payment of 10% or $15,000. If you were to invest this $15,000 down payment and the $7,500 home purchase costs covered above, you would generate income. Assuming a conservative interest rate of 5% per year, this $22,500 savings would yield $2,491of annual income (or $207 per month) over the life of our assumed 30-year mortgage.
- Alternatively, when purchasing a home, a portion of the mortgage payment builds home equity – or the percentage of the home that isactually owned. In our example, in the first year of home ownership mortgage payments would be $8,645, of which about $2,010 (or $168 per month) is equity. The balance of $6,635 is the interest – the cost of borrowing the money.
With this additional insight, let’s revisit our example:
|Subtotal of monthly payments||$1,000||$1,370|
|Offset by investments||(207)|
|Total Monthly Payments||$793||$1,202|
Now we see a greater difference between our two scenarios. The Total Monthly Payment is what matters the most – it represents the payments you will have to budget for every month. In our example, it costs about 50% more to purchase a home.
What is the bottom line? The calculators are essential tools but there are other equally important but less tangible points to consider. Home ownership is a personal choice with no right or wrong answer. The only answer is the one you decide after carefully weighing a variety of options.