Should I Rent Before Owning a Home or Condo?
There are many factors involved that can make a choice to rent before owning seem like an extremely complicated decision. Naturally, the place that you select to live will have a deep impact on your overall quality of life. Home ownership for many, especially first-time buyers, is highly desirable, but thinking about the overall financial commitment can be stressful. The internet age has brought us so much information about why buying a home is fiscally smart, while at the same time, we are bombarded with news about bank fraud (hello Wells Fargo CEO), foreclosures, and politicians painting doomsday scenarios about the state of our national economy. However setting all hype and outside noise aside, strategic execution into buying a home can be the best decision of your life. After all, real estate, when viewed upon as a long term investment over decades, has proven to be extremely effective and lucrative. This guide will help you to weigh out the pros and cons of if and when to rent before owning so that you can make a wise, informed choice for your future.
There are expenses associated with owning vs renting a home that should be weighed carefully, starting with an honest assessment of the overall costs. While there are variables in the figures depending on the property, this guide will give you a solid place to begin your understanding. We’ll examine each expense in detail and provide useful hacks covering the questions to ask when renting a house and more. It will be best to create a google doc and do a side-by-side comparison of these costs, line by line and then below the costs, make some overall notes. Doing the exercise of reviewing and budgeting your living expenses is well worth the time as it may open your eyes to costs that you might not have considered.
What to Look for When Renting a House
When you rent a house, the first thing to think about is the timing, duration, and amount of the lease. Everything is negotiable, so you will want to make your first offer to the landlord below the asking price. It is not uncommon for renters to make their first offer 5 to 10% below the asking price for the property. Next, you’ll want to consider the timing of the lease. If you are already contemplating to rent vs own, you’ll want to keep the lease term short. Extended lease terms are better for those who are not contemplating ownership. Most leases will start on either the 1st or the 15th of the month. However, elevators for condos are generally in high demand during those dates, so you might want to make arrangements for them as soon as you get an executed lease agreement in place.
When renting a house, you will have expenses associated with moving, including the moving team and vehicle. Overall, it’s important to research credible movers with many, many positive reviews online. If you don’t do your proper research, this cost could balloon several times over. Interstate moves can be particularly challenging as less reputable movers have been known to hold furniture ransom for additional fees since the entire move period takes longer and requires more logistics. Also, remember to buy your packing items in advance like boxes, bubble wrap, and packaging tape. Movers will often charge you triple the cost of these items.
Security Deposits and Upfront Money
Your landlord is likely to require a hefty security deposit that might grow if you have pets or other circumstances as outlined by their policies. The standard move-in fee of the first month, last month and security deposit has lately been adjusted by savvy landlords requesting the first month and two months of security. This would allow the landlord more control of deposits and a less desirable situation for the renter. Beware of anyone telling you that this method is ‘standard,’ it isn’t, and everything is negotiable. Also, there may be some non-refundable fees charged by condo management for usage of the elevator and truck docking station. Remember to inspect your new home extensively before handing over your deposit, and writing all of the property defects that will either be fixed or remain as-is, as part of your home rental agreement. This will protect you and give you peace of mind for the eventual return of your security deposit.
Potential Storage Costs
Think about the amount of clothing and personal items that you have. If your current space is larger than your potential new house, you might have to factor in the purchasing of storage space. These storage units will be cheaper to rent outside of major urban cores. So, if you need storage, do your research and look at options that may be a bit further away than you had originally envisioned. If a unit that you are looking at renting is listed as furnished, and you have your own furniture or you don’t like their furniture, remember that a deal can be made to keep their furniture in storage and rent the property as unfurnished.
Each month, you will have to pay utilities that are not included in your lease. Your utilities expenses will almost always include electricity and often water/sewer/trash fees. Some condominium complexes offer free cable tv, but the entire business model for television is changing. Your best bet might be to cut the cord and get your television channels online through Slingbox or Playstation Vue. Those services are much cheaper than conventional cable or DirecTv. There also may be additional monthly fees for parking when you are renting a condo or home.
Home Renters Insurance
Renters insurance is a must. Things happen. If there are any unforeseen circumstances affecting you negatively while renting a house, you’ll want to be protected. Luckily, renters insurance is relatively affordable. Just be sure to shop around and get bids from at least three different insurance providers and make sure that you are comparing identical policies and coverages.
Costs of Purchasing and Owning Your Home
Buying a home has several unique, one-time fees to consider. The obvious and most important question to ask yourself is…do I have enough money for the downpayment that will be necessary to get a mortgage for the house? For this matter, it is best that your speak with a qualified mortgage broker. They will give you an array of options on programs to best suit your present cash savings and future projected income. During the process of buying the house, you will need to have it appraised and inspected. Your real estate agent should help you with proper referrals to keep costs under control throughout the buying process. These buying fees often include mortgage fees, mortgage points, commissions and legal fees. Cash buyers will save on the fees associated with the mortgages. As a rule of thumb, it is wise to 3 to 5% of the overall cost of the home for closing expenses.
Moving Fees and Homeowners Insurance
As with a rental, you will have expenses associated with relocating your household. These moving fees should be about the same as those projected for renting a home. Homeowners insurance will also be mandatory. Note that the difference between homeowners and renters insurance is that for the renter, they are not covered by the Homeowners policy. Homeowners insurance covers costs of rebuilding the home as opposed to renters being in place for the protection of a renter’s personal items. In some instances, the costs of homeowners insurance may be paid by the mortgage lender, but this will most likely lead to larger monthly mortgage payments, which we will examine next.
If you have chosen to take out a mortgage on your home, you will have the monthly mortgage payments to consider. These will vary greatly based on your down payment amount, the current market cycle for interest rates (currently very low), whether the rate is adjustable or fixed (fixed is best for low-interest rates), the payback term for the mortgage (15 and 30 years most common if fixed rate), and any other terms negotiated between the bank and borrower. For every property listed on the Sky Five website: both homes and condos, we have a mortgage and expense calculator which will help you calculate your projected monthly mortgage expenses.
In the United States, property taxes are controlled by the local governments. Rates vary between 0 and 4% of the assessed value of the home and land. They are generally due at the end of the year in a lump sum, however, it is wise to calculate your monthly amount of tax due from the annual sum for budgeting purposes. One of the most desirable benefits of home ownership is the fact that home mortgage interest payments and mortgage insurance premiums are fully tax deductible. It’s an outstanding encouragement by the government for its citizens to buy their homes.
Most condos and planned living communities charge a monthly fee for the upkeep of the areas surrounding your home. This can be a tremendous positive in terms of saving you time and work, however, it comes at a price. These fees vary a great deal from negligible in single family home neighborhoods without guards, gates and landscaping services…to thousands of dollars per month for premier condos in ultra-luxurious buildings.
Property Upkeep and Maintenance
When you own your own home, you will need to factor in landscaping, repairs and overall home maintenance that is not covered by a Homeowners Association as listed above. This will include maintenance to appliances, plumbing and electrical. Consult with a guide on how to buy a waterfront home for more specific variables which you might encounter for that type of property. Find a good handyman in your area with strong online reviews. This could save you a lot of money in the long run.
Own vs Rent Deep Examination
Of course, the above is just a brief glimpse at the financial impact associated with each of your options. Are you interested in purchasing a home as an investment? While it is true that you can build up equity in a home and cash out down the line with a nice profit, that is not always the case. If you are considering purchasing a home solely to make money, you will need to be extremely prudent in the home buying process, and explain your overall wants and needs in detail to your real estate agent.
Timing and Location
The choice to buy a house ties you to a specific location. If you love the neighborhood, city and general atmosphere, great! However, if you want to move away in the near to mid-future, you should certainly think about the flexibility that renting has to offer you. Real estate appreciation can be quite lucrative over time, but you need to understand that real estate is a relatively illiquid investment…meaning that you can’t get in and out of it easily – like pushing a button, selling a stock and having cash in a few days. The process of selling a home takes time and to achieve a particular price; significant skill is required on the part of your Realtor that is negotiating on your behalf.
Homework and Research
When looking for a home to rent before owning, renters are usually only obligated for a year. Some leases require even less time, and you can find options that are for a month-to-month term. If you do not have stability in your work and personal life, you might prefer the freedom that comes with a rental. On the other hand, purchasing a home could provide the catalyst you need for stability. It is important that you understand the neighborhood before you sign any papers, whether for a rental or a purchase. You should utilize both the internet and in-person searches to find out about the community and the people who live there. Feel free to ask current tenants or owners about the neighbors. It is also to ask tenants about their experiences with the landlord. Is he or she kind, professional and easy to communicate with or are they slum lords, looking to bend rules and keep deposit money at all costs? You can find a map showing the crime statistics for cities across the country with a quick Google search. Additionally, you can drop into some of the local stores to get a feeling for how friendly the neighborhood is.
Knowing the Neighborhood
Watch the interactions of the staff with the patrons, not just your own experience. Take a drive by the prospective new place on a late weekend night to see if the neighborhood has the same “vibe” as during the day. Understanding the neighborhood is one aspect of choosing wisely. A friendly neighborhood with a stable economic forecast will be more comfortable for you either way. However, you will experience greater benefits from your research when buying a home due to the long-term commitment and experience.
Another consideration is privacy. When you are renting a home, the rental agency or property owner can come onto the property with only a small window of notice. The specifics will depend on where you live. However, they have the legal right to enter and work on the place, even if you do not want them to. For those who appreciate privacy, this can be troubling. On the other hand, if you choose to purchase a house or a condo, you have the right to complete privacy. Nobody can enter your home without your permission other than law enforcement agents who have legal clearance to do so. Many really appreciate having this type of control. Of course, if you are the homeowner, you also have the opportunity to get to know others in the neighborhood and work to strengthen the community. While renters can certainly contribute to the greater good, the local pride and commitment that come with ownership provides many with a sense of purpose and contribution.
Freedom for Remodeling
If you rent a house or apartment, you must adhere to the current construction and decor. While some landlords will allow for a slightly different color paint or some other minor remodeling, you are pretty much stuck with what you see. However, those who own their homes have a range of choices limited only by imagination and finances. Should you choose to buy your home, you can not only paint the walls any color you please, you can add rooms, knock out walls or install a sauna. Of course, you have to adhere to the local building codes to ensure your safety but, you have creative freedom over your property. Additionally, you will receive tax incentives at the federal and state levels that are not available if you rent before owning. Talk to your accountant to determine the best way for you to utilize these for your home and your remodeling and upgrading efforts.
However, there is a downside to this freedom. Just as you have creative control, you have the complete responsibility when something goes wrong. Whether a seasonal storm downs a tree into your living room or a pipe bursts in the bathroom, it is your burden to fix the situation. While you might hire professionals to do the task, you bear the responsibility of finding qualified and reputable people as well as their expenses. Most homeowners find it necessary to learn some basic maintenance skills to avert some of these costs. For instance, cleaning the gutters and furnace filters. Getting to know these aspects of your home can help you to connect to your house, and can increase your pride in ownership.
Another factor involved in the decision-making process is the amount of stress involved. While buying a home can be a great experience, it increases the amount of stress you are under for a while. If you or another member of your household has recently experienced several high-stress situations, you might want to hold off on buying a house. Of course, you also get away from many stressors by moving into a home of your own. As a renter, you may be subject to an eviction if certain rules are broken. While the landlord does have to give you a certain amount of notice, it can be quite stressful to relocate suddenly and without expectation. If you own your home and pay your bills, you need not worry about that.
Pros and Cons of Rent Before Owning
If you and your household have the financial stability to obtain a mortgage and have an interest in setting down roots somewhere, then purchasing a home may be the best way for you to go. On the other hand, if you are not yet settled into your adult life, you might want rent before owning until you have a clearer path for your future envisioned. Remember that renting gives you the freedom to move much more quickly than buying, but that the choice is not only up to you. You exchange limited control in decorating for the maintenance issues that arise. Is this the type of living arrangement that you desire? Or, are you interested in having the creative freedom to design and live on your own property with the privacy and responsibilities? Are you prepared for the shift in financial affairs as well as how the choice will impact each member of your household? If so, you may not need to rent before owning. Even if you don’t select a condo or house, you’ll still want to have these same questions to ask when renting an apartment.
Renting Won’t Make You Wealthy
Make sure you understand how each choice will impact your family, talk to your spouse, and take an honest look at what you want in your life for now and in the future. Owning your home rather than renting is a great choice for those who are prepared. Real estate ownership continues to be one of the greatest investment vehicles available. The process of finding, buying and moving into the perfect home can be extremely exciting and way to come out ahead financially by a great margin. For those that don’t feel compelled to save and invest through other means, home ownership is a way to invest in a bright future without having to put constant thought and action towards investing. Appreciation over time and the gradual pay down of your mortgage works tremendously in your favor.