Rent vs Buy, is the time right for you?
There are several reasons why people opt to rent instead of buying. Reasons may include a recent divorce, poor credit due to a recent foreclosure, short sale or bankruptcy, or what I’ve found to be very common is that people just don’t realize that they can afford to own a home. In many cases it may be less expensive on a monthly basis to buy vs rent.
Everyone’s situation is different and for some it may make sense to continue to rent. If you’re unsure about your longevity within a certain city or job situation, it may make more sense to rent. If you are the type of person that doesn’t do well with saving money or putting funds aside for emergency situations, renting may again be a more realistic option. However, if you just don’t think you can afford it because you don’t have a good down payment, think again. Poor credit, there are lenders that will give a mortgage the day after foreclosure, short sale or bankruptcy, albeit it will probably be a very high interest rate. What about after getting a divorce? The rules have changed, many lenders will now accept just one alimony payment as enough evidence of compliance with the divorce decree and will consider that as a credible source of income.
So, what are the advantages of owning a home vs renting. Well the reality is that regardless of which option you choose, you’re paying a mortgage. You’re either paying your own mortgage, building equity in the property for yourself and gaining the benefit of an additional tax write off (consult your tax professional.) On the flip side, if you’re renting, especially from a private property owner, you’re more than likely paying their mortgage and building equity FOR THEM! So, either way you’re paying a mortgage. Let’s take a simple calculation:
Average Chicago Rent:
$2,200 x 12 months = $26,400
x 3 yrs. = $79,200 (in total rent paid over 3 years)
In other words, if you’re paying $2,200 a month in rent, it’s going to cost you almost $80,000 in 3 years with no benefit to you. Now let’s just say for rough math that you have a 30-year fixed mortgage with a 5% interest rate and a monthly payment of $2,200 including Principle Interest Taxes and Insurance (PITI.) We’ll assume taxes are about $5,000 a year and insurance is $1,000 a year. That leaves about $1,700 in principle and interest on your mortgage. Let’s look at what you gain for that same 3-year period. Now of course you’re still paying almost $80,000, but you’ve built roughly $11,270 in equity assuming the property has neither appreciated nor depreciated over that period of time. You’ve also paid interest which under the current tax laws (again talk to your tax professional,) and you’ve given yourself about a $10,000 annual write off on your taxes. We’ll use a 20% tax bracket for purposes of our calculation. Over that same 3-year period you have now also saved yourself about $6,000 in taxes.
At the end of the day, there are many legitimate reasons to rent and many other good reasons to buy. It ultimately depends on your situation and every single person and situation is unique. In order to truly understand what makes the most sense for you, do yourself a favor and send me an inquiry below. I would be happy to sit with you and discuss your situation and help evaluate what makes the most sense. I can also connect you with the appropriate professionals to help guide your decision and help you gain valuable insight. Please also feel free to use my “Am I better off Renting?” calculator.