Too numerous to count have I witnessed the debate of “Rent vs Buy”. The topic of buying a home or renting an apartment can have lasting impacts on your financial future. Because this is a real estate blog, I’ll vouch that everyone should own their own home, but of course, every person’s situation is different. That’s what we’ll explore in today’s topic of Renting vs Buying a home.
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Buying a home
The market is getting hot. All your friends are buying. Let’s face it, buying a home can be a daunting process, whether it’s your first home or your 5th home. If you’re a first time home buyer, this may be the most expensive and emotionally driven purchase in your entire life. Let’s dive deeper to see if home ownership is the right thing for you.
Finances:
Are you financially ready? Banks generally require a down payment of 10-20% for conventional loans to buy a home. Zero percent down payment loans are available now and there are FHA loans that require only 3.5%, but I don’t recommend this route unless cash is absolutely an issue.
Renting an apartment does not require any down payment except a security deposit.
Mobility
Buying a house is a long-term commitment. If you have a job that requires you to move around often, it would be better to rent as selling your home becomes an expensive process often costing up to 10% of the sale price per transaction in fees.
Are you planning to stay for more than 5-10 years?
If you’re planning to live in the home for more than 5-10 years, it is more feasible to own your own home. Appreciation of the home’s value is also a plus. In Seattle, if you bought a $800,000 home in 2012, your home’s value would be about 2x right now in 2019.
Apartment rents have only risen in the past and especially in the last 10 years in Seattle. Data shows from 2009 to 2019, the fair market rent in King County for a 2 bedroom increased $987 to $1,899, an increase of 92%.
Expenses/Maintenance
The biggest “hidden” expense of owning a home is the maintenance. Have a yard? Need lawn mower or hire a landscaper. Broken toilet? Leaky roof? Have a swimming pool? Good luck. Even worse if a water line breaks and the entire home floods. Lots of headaches come with owning a home and lots of major expenses that follow. Because your home doesn’t last forever and deteriorates over time, every part of it will need to be replaced at some point in its life.
On top of paying for your mortgage, there are property taxes and home insurance. For the average home in Seattle, expect to pay an average of $8,000 per year in property taxes.
With apartments, barring any human use errors, should anything break in the apartment it will be fixed and covered by the landlord in a few days. Renting is designed to be hassle-free. Even the landscaping is kept nice and tidy by the groundskeeper!
Tax Advantages:
The current tax code is designed to favor home ownership. When you file your taxes, there are tax write offs for mortgage interest and property taxes.
If you’ve lived in your primary home for 2 years or more and sell, the capital gains from the proceeds of selling are exempt up to $250,000 for those filing their tax return as single and $500,000 for married. For example if you sell your home and profited $150,000, normally, you would pay $11,000 in capital gains taxes to Uncle Sam, but the gov’t incentives home owners to buy and live in their primary home and you would owe zip, nada.
There are no tax advantages when renting an apartment except for a small minorities or renters who use part of the space for business purposes or as an office.
Concept of Asset vs Liability
Assets – Liabilities = Equity. This is the fundamental of every balance sheet in the financial world.
To break it down, Assets tend to be more tangible, such as a home, car, or even stocks. Liabilities, simply put, is debt or rent; things you owe to others for an exchange of goods or services. The end result is Equity or how much you own after your liabilities are factored.
When creating wealth through real estate, the question is how do I increase Assets quicker than my Liabilities and therefore create more Equity? The answer lies in the type of assets you own. The best kind of assets are the ones that make you more wealth, ones that don’t depreciate in value over time. I’m talking about real estate… your home! Housing never depreciates in value, unless neglected, because it sits on a scarce commodity – Land.
On the other hand, renting an apartment is akin to a liability because you’re paying for a commodity that does not generate income or equity (refer to our handy equation above).
Summary: Buying vs Renting
If holding real estate long term is your game plan, consider purchasing long term assets that produce and generate income such as real estate rentals or short term assets via house-hacking.
For a large portion of the population, owning your home may be out of reach. In the next blog, I will explain how its possible to buy a home with almost no money down and $0 out of pocket within the first year of ownership.
Born and raised in the Pacific Northwest, I eat, sleep, and breathe real estate. As your agent, I’m attuned to your needs, knowledgeable of market trends and conditions, and dedicated to helping you reach your real estate goals. Buying a home is one of the biggest decisions in life, and it’s my passion to help you find the right home and to be on your side through the entire process.