Rent vs Buying a Home – Which option makes more sense for your needs?

“Home” is an essential requirement for all of us.
We all as children or parents have been owning or renting a house throughout our life.
Most homebuyers wonder whether their decision to buy a home is the right choice or not.
Sometimes, buying a house may seem like the best choice. On other occasions, renting a home appears to be the brightest choice.
However, both these choices have their pros and cons, and the decision generally depends on the situation.
Thus, the recommended way to make your golden decision is by carrying out an in-depth evaluation with all perspectives in mind.
However, people assume that renting a house is way cheaper when compared to owning a house.
Considering this assumption today, let’s have a brief look at renting vs buying a house from the financial and requirement perspectives.
Facts To Be Examined Before Purchasing A House
Each one of us has varied requirements for purchasing a house.
Despite the various purposes, there are some crucial points the buyers need to be aware of before owning a home.

  • When you buy a house, you will be responsible for additional payments apart from the purchasing price, which may include taxes, maintenance cost, insurance, etc.
  • Once you’re done with the purchasing, you have less flexibility to shift to another town or country. So, if you are holding a temporary job or expecting a work transfer, then purchasing a house will not be the right choice.
  • The home market prices will fluctuate over time. Thus, the rise or reduction of the property price will depend upon the period the property was brought in. Thus, reselling the purchased property will not always be cost-effective. Make sure to buy a home only if you’re fully confident of settling down in the same place.

An Overview Of Renting Vs Purchasing A House
Renting or purchasing a house is a significant decision we make.
It not only affects our finances, but it also brings a massive effect on the lifestyle and the savings we collect over the years.
Usually, people buy houses when they are economically better in switching away from renting because everyone considers it as an investment to increase their wealth.
But, it is not always the correct decision.
Renting a house can be cheaper when compared to purchasing a home, and it is more flexible.
Don’t fall victim to the real estate brokers.
When it comes to selling a house, it is considered as a big business.
Generally, the real estate brokers and mortgage lenders bombard the buyers with the information that reinforces that owning a home is the key to happiness and will facilitate the buyers in becoming financially stable.
But, according to the homeowner’s point of view, purchasing a house is not always better than renting.
Thus, we recommend you figure out all the required information about both renting and owning before making this important decision.
Key Points To Be Considered
Renting a house offers high flexibility with affordable monthly rent, zero maintenance expenses, less capital, and it is far easier than purchasing a house.
On the one hand, homeownership brings pride, high stability, and helps in building home equity.
On the other hand, it comes with additional costs, such as tax, security, and repairs.
Keep in mind that renting a house isn’t always a “throw of money,” and purchasing doesn’t necessarily mean “becoming wealthy”.
When to Rent or Purchase a House?
Contemplating whether to rent or purchase a house is not always straightforward.
Behind the scenes, there is a complex decision-making process you will potentially have to undergo to make the right decision.
Thus, it is crucial to answering the below-listed questions to make a well-versed choice.

  • How long are you planning to stay in the area?
  • Out of 1-10, how much flexibility are you enjoying in buying a property?
  • Can you manage the costs, such as tax, insurance, etc., involved in homeownership?

The central fact that needs to be considered when buying or renting a house is how long you are planning to stay in that particular location.
If you are hoping to stay only for a few years, which is typically less than three years, it will always be beneficial to rent a house.
It is because buying a house usually involves a high down payment, loan charges, insurance, appraisal fees, etc., which is costly for a short-term settlement.
Hence, renting is way cheaper as you will only need to pay very less amount that involves an application fee, real estate agent fee, refundable security deposit, etc.
But in case if you’re planning to settle down for more than 30 years, then renting will be more expensive than purchasing a house.
In that case, purchasing a house will be a better decision.
The Smart Decision-Making Process — Price-To-Rent Ratio
According to experts, the smart way to decide whether to rent or buy a home is by calculating the price-to-rent Ratio.
This Ratio will give you a rough idea of the cost of the house in a particular destination.
To figure out the price-to-rent Ratio, all you have to do is:
Find two houses in the same area — one for rent and one for sale.
Then, divide the sale price of one house with the annual rent cost of another house. The answer is the price-to-rent Ratio.
For example, there is a house worth $400,000 for sale in a particular area. You find another house to rent in that same area for $2000 per month, which will cost $24,000 annually.
Dividing $400,000 by $24,000 will give you the price-to-rent Ratio, which is 16.7. This number will help you enormously to make a better decision from the financial aspect.
Do you want to discover how?
Experts reveal that a price-to-rent ratio which is lesser than 20 makes more sense for purchasing a house.
However, if the price-to-rent Ratio is greater than 20, then it is better to switch towards renting a home.
Also, don’t forget to consider your family income as it plays the ultimate role in owning or renting a home.
Rent or Buy Calculator
Another smart way to decide on renting VS buying is by comparing the cost of rent against the cost of buying using a rent vs buy calculator.
It is the handiest way to think about which option will benefit you more.
Typically, there are many rent vs buy calculators — you can choose any of them, but I would like to recommend the most famous Rent vs. Buy calculator by The New York Times.
Final Words
“Rent vs buy” is a very complicated and hectic situation when it comes to decision making.
Your decision will have a high impact on your economic and life plan.
Don’t be a victim of the real estate brokers.
Most of the real estate agencies or brokers may brainwash you to invest in purchasing a house, saying that it will be the greatest saving.
The housing industry will tell you numerical myths to convince you on homeownership, thus make sure not to fall on to their words.
Note: If you think of purchasing a house, then we recommend you consider all the charges related to purchasing and think twice before investing in it.
You should buy a house only if you think of settling down in the same place for a long term.
Else, it will put you down financially.
Renting is also a smart way, as it is more flexible and cost-effective. But, it will not be the right choice for a long-term settlement.
Think wise and think bold before making the ultimate decision.

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ABOUT THE AUTHOR

Jun Sing Tan

I help young adults and working professionals achieve their financial goals with a full suite of risk management and wealth accumulation solutions. I firmly believe that financial education should be easy and achievable for all. I am committed to service and hope to be your one stop financial solution.

author

Jun Sing Tan

November 21, 2020

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