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Is it Better to Buy or Rent?

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Buy and Rent Checkboxes on an Adhesive Note
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By Pat Mertz Esswein

If you're uncertain where life might take you next -- for a job, a relationship or just a change of scenery -- renting beats buying. It costs a lot less in terms of time, effort and money to break a lease than to sell or rent out a home that you own. Plus, the landlord is responsible for maintenance and repairs.

Buying can be a great investment -- or a lousy one, depending on the market where you live when you buy and when you sell. If you buy and home values go down, you may have to wait to sell to get back the money you invested in a down payment and mortgage closing costs (see advice on what it takes to qualify for a mortgage).

It usually makes sense to buy only if you plan to stay in your home for five to seven years. That's generally long enough to recoup the upfront cost to get a mortgage and the back-end costs to sell and pay an agent's commission. If you fit that profile, now is a good time to buy; most cities in the U.S. have recovered from the housing market bust that began in mid 2006, and mortgage rates are still superlow. Once you become a homeowner and prices rise, you'll be rewarded with the power of leverage -- you may put only 20 percent (or less) down, but you get 100 percent of the appreciation. Regardless of whether your home's value goes up, you'll benefit from the tax deductions for mortgage interest and property taxes if you itemize deductions on your federal tax return. And you will probably be able to keep up to $250,000 of profit tax-free when you sell ($500,000 if you're married and file your income taxes jointly).

If you're on the fence about buying or renting, take a look at the price-to-rent ratio where you live (the median sale price of a home divided by the average annual rent for a comparable one). In general, if the ratio is less than 15, the market favors home buyers; if it's more than 20, it rewards renters. Right now, the ratio nationally is a balanced 14.8, according to Marcus & Millichap, a real estate research firm. Ratios between 15 and 20 can go either way, depending on factors such as taxes and the potential for appreciation. The ratios in such millennial meccas as New York City, San Francisco and Washington, D.C., typically favor renters, but a spike in rents and low mortgage rates is tipping the ratios in favor of buyers. (For a look at the largest 100 cities, see Trulia's Rent vs. Buy Map and use the calculator to assess your situation.)

Even with your down payment in hand, landing your dream home could be a challenge, especially in markets where the inventory of homes for sale is low (often the same markets where rents are inflated) and the best homes attract multiple bids. What you can do: Get preapproved for financing to make your bid more attractive. And ask the seller's agent if you can get the home inspected before you make an offer so you don't have to include it as a contingency in the contract.

 

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