Since the pandemic started, the world has realized the importance of many things. One of them is ‘HOME.’
“The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.”
— Maya Angelou
2021 is unfolding, and it appears not much has changed. Owning a space is of utmost importance, especially in the time of great uncertainty. Many of us are still calculating whether I should buy a house or rent an apartment. It’s a big decision! It affects your financial standing and lifestyle. So, it is necessary to weigh the pros and cons of renting vs buying before making the final call.
Before we jump into what you should do in 2021 – rent vs buy, let’s first understand the significant difference between the two options in brief.
Renting means you don’t have ownership of the space you live in. You need to pay a certain amount to the landlord (owner) each month for using his/her property temporarily. However, all the maintenance and repair will be taken care of by the landlord..
When you live in a rented apartment, you know exactly the amount of money you’re going to spend on housing monthly. You have the freedom to move to another property, location or city whenever you wish or when your lease ends.
Owning a home is a dream of every individual. It is considered a significant asset and brings a sense of belongingness, stability, security and pride. There is no landlord. You have better control over the ambience. When you own a home, you have the freedom to customize or upgrade it according to your taste, lifestyle and desire.
Difference Between Buying and Renting
Besides the matter of ownership, there are some key differences between buying and renting.
Buying a house is a smart financial move. It can build equity and credit over time. That means if the value of your home increases, you will get a high amount of money when you sell. Also, rising rents will no longer be a problem for you.
Homebuyers can build equity in various ways. They can either choose to make a big down payment, pay more toward the mortgage debt every month or boost the property value. All in all, equity building takes time but makes more sense than renting.
Another factor that you should consider is the repair and maintenance cost. For example, if there is any roofing, plumbing or electrical issue in an apartment. It’s the responsibility of the landlord to fix it and bear all the expenses.
On the other hand, if you’re the owner, you are responsible for all repairs and upkeep. So, it is necessary to evaluate maintenance and repair costs before purchasing a home.
Real Estate Tax Implications
Home taxes play a significant role in your decision – Buy a house or rent an apartment. You need to rationalize various taxes and decide whether you’ll be able to deduct interest on your mortgage or not.
Pros and Cons of Buying a House vs Renting an Apartment
Benefits of Renting a House
When you live in a rented apartment, you have relocation flexibility. For example, suppose you suddenly need to move to another city or state due to certain circumstances. In that case, you’re not tied down to space, and it’s easier to make a move breaking the rental lease (generally designed for a short period) or giving one month’s notice to the landlord.
Fewer Expenses and Responsibilities
As a renter, you have fewer responsibilities and financial concerns. You don’t need to worry about home repairs, society maintenance charges, painting, property tax bills, insurance and a lot more.
The advantage of staying on rent is that you are only responsible for monthly rent payments. The landlord incurs all the other living expenses.
Lower Upfront Cost
Another benefit of living in a rented apartment rather than purchasing a home is its lower initial costs. Taking possession of a rental unit only costs you an application fee or security deposit (one-month rent payment in advance). But a home buyer needs to pay property taxes, down payment etc.
The bottom line is upfront costs associated with purchasing a new home are much more than staying in a rental property.
Drawbacks of Renting a House
Limited Ability to Upgrade or Remodel
Renters have limited to no flexibility to customize their space. They cannot make any changes on their own.
Tenants seek approval from the landlord for renovation or upgradation of the property, such as decorating the space, painting walls, hanging artworks etc. At some places, rental properties have a ‘No Pets’ policy.
The Landlord Calls the Shots
Your landlord can decide to increase the rent of the apartment whenever he/she wants. That means you are left with two options, either accept the decision or move to another place.
He/she can even ask you to leave or put the house up for sale anytime. As a tenant, it is important to read the rental agreement carefully to understand the notice period or other legal details.
No Wealth Creation
One of the biggest disadvantages of staying on rent is investing in someone else’s future. Your monthly rental payments can help the landlord to pay off the loan. The purchase price of a home might be equal to all the rent you pay during your lifetime.
That means you are simply throwing money; rather, you can use it to generate long-term equity.
Benefits of Buying a home
Stability and Security
Owning a home brings long-term security and stability in a fixed location. You don’t have to worry about moving to a new place when the lease ends or the landlord decides to sell the property. It also gives you peace of mind that rents won’t increase with time.
When you have the ownership, you can create your dream home as per your desire or changing needs. You have the freedom of decorating the house without any interference from the landlord. Home renovations generally increase their value.
You’ll Be Investing in Your Future
The biggest advantage of owning a home is that you are building equity with every mortgage payment. As your mortgage decreases, equity will build up. This gives you more power for other financial investments or goals.
Drawbacks of Buying a home
As a homeowner, it’s not easy to move to another location. For example, in the future, to accept your dream job offer, you need to move to another state. Then, it’s a difficult decision for you to make.
Higher Upfront Costs
Buying a home involves high upfront costs. Besides a down payment (3–20% of the purchase price), you must consider all other expenses such as property taxes, home inspection, closing costs (2–5% of your loan amount), first-year homeowner’s insurance premium, mortgage insurance, etc.
Expenses and Responsibilities
There are a lot of expenses involved and responsibilities on your shoulder once you buy a home. As a homeowner, you have to bear all the repairs and maintenance expenses which can impact your savings quickly. You are responsible for fixing everything in your dream home if anything breaks.
Should I Buy a House or Rent in 2021?
Now, you must be wondering, is it better to rent or buy?
It isn’t just about money; the decision also depends on your circumstances and vision for life.
If you are young, don’t have family commitments, don’t have kids at school, and you are yet to accumulate any assets, it may be better to rent and invest any additional money (the difference between the mortgage EMI and rent) as well as the expenses associated with the upkeep of a home ( example: insurances, maintenance, rates and interior decorations) towards a rental property or a diversified stock portfolio or a mutual fund, depending on your ability to tolerate the volatility associated with growth assets.
Keep in mind that once you invest in a rental property, mutual fund or a share portfolio, it’s best to leave the investment for the long term (10 years plus).
On the other hand, if you have a stable income, you already have some investment assets, a family and kids at school, it may be better to buy a home for your family.
A residence can bring emotional stability and certainty in one’s living situation, which is required for peace of mind, and that is necessary for developing one’s career.
Remember that if you are over the age of 35-40, and you decide to buy a home to live in, you ensure that the total amount you borrow from the bank doesn’t exceed two times the annual household income. This will allow you to live without stress, meet EMI payments comfortably and still have money left over to invest for future retirement.
Ultimately, it’s a financial and emotional decision. And if you’re still unsure, better to take help and advice from a real estate agent.
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