To buy or rent, that is the question

Posted: Jun 13, 2007 7:57 PM

What a crucial time to ponder one of the most ponderable thoughts in our society, rent or buy or is it buy or rent? I am going to give you the best reasons for each, in my opinion, up front, and then explore the pros and cons of each in depth. This exercise is meant to stimulate your own thoughts on the matter and help you decide which is best for you.

Before I get into the meat of the article I wish to give you a caveat: age is a major factor which I will not be dealing with in this dissertation. Young people and seniors have reasons to do one or the other based on where they are in their particular life cycle which really colors their outcome. . I just want you to realize this and try to examine this from an economic and life style perspective as one would if they were of the time in their life cycle where shelter and economic concerns are paramount.

The best reason to own (buy) a house is tax free accumulation coupled with the tax exempt sale of the property, for most Americans. Unlike most investments as your equity grows by either appreciation or amortization you are not liable for any tax and when you sell after owning your personal residence, and occupying it, for a minimum of two years your profit is sheltered for the first $250,000 for a single person or $500,000 for a married couple. The vast majority of Americans can leave their residence with up to 1/2 million dollars by simply living in their "home" and making the payments. This opportunity is unequaled in our current society. And you can do it over and over again every two years!

The number one reason to rent is carefree living. You neither have to worry monetarily or spend your time (time is money for some) fixing or repairing anything in your dwelling as the landlord, in most instances, is required to fix and repair anything that is wrong with the apartment or rental property. You will not have a "money pit" and if things get too bad you can pick up and move in a "nano second", compared to selling a house and moving on.

That's it, in my opinion, the best reason in either case to do one or the other. Now let us look at the supporting reasons to do one or the other.

House payments include principal, interest and also property taxes and fire, theft and liability insurance. Generally they are much higher than rents and only the interest and property tax is deductible. However, the deductibility brings the payment much closer to the rental figure. At most times rents are cheape than the total house payment but at this time because of the slowness of real estate sales, builders are pulling in their reigns and rental properties are showing some signs of shortages causing higher rental rates. Who would have figured that?

As far as taxes go some states give renter tax credits but they appear to be insignificant compared to the benefits from the interest and property tax deductions of owning.

The entry costs for either side were pretty even for a while until the recent sub-prime debacle. We had 100% financing, zero down for almost anyone who had a pulse and this more than challenged the idea of first, last and security deposit for rental properties.

Zero down which was available to a low of 580 credit score, or in some cases lower, could be enhanced by having the Realtor negotiate the seller into paying for the closing costs. This made purchasing with 100% financing really "zero down". Today it has tighten dramatically and you need excellent credit to get 100% financing so in most cases it is cheaper to get into a rental than a home of your own.

Utilities are nothing to sneeze at these days. I now understand why my father constantly said "turn off the lights"! Most rentals require the renter to pay their own utilities or at least most of the utilities with water generally handled by the landlord. Rentals tend to be smaller and therefore might have significantly lower utility bills.

Some believe that because you are renting and do not have the costs of a house you have more discretionary income to invest in other things that can help you build a nice sum for the future. This is an offset to paying rent and having only receipts in latter years which doesn't help your income or net worth. I believe that the super tax benefits of residential owner occupied properties far exceeds what most people are able to do with the incremental savings from the lower rents versus mortgage expense.

I must admit that I am biased toward home ownership and have been most of my life. Once I passed the time in my life where the type of car I wished to own was my predominate thought I became a zealot in planning my first house of my own. (In reality it was the banks house with a small slice of ownership for me. Way before I knew what a mortgage was I knew that I had to buy a house for myself, the sooner the better. I rented when I was young and until I could come up with a down payment that would get me into a house. Actually I never accomplished the down payment (I borrowed my way in with a first, a second mortgage and a borrowed down payment). I had a good job and career and that was all I needed to know. That was almost four decades ago and I haven't been without a house since.

I hope this provokes you enough to get you to make the move, what ever it is, to set your life on the perfect keel for you. I'm rooting for ownership for you to really partake in the American Dream!