Buying a Home Part 2, When Renting Makes More Sense

As a Realtor, it’s expected that whenever I’m asked if it’s the right time to buy, my immediate answer will be, “Of course, forget <insert good reason why not to buy>, now is the perfect time.” Unfortunately my father taught me that it’s best to understand a client’s needs and suggest appropriate actions that meet those needs. For example, let’s assume my client is a doctor who carries large student loans and plans to leave in the next two years for her fellowship. I’d suggest renting in this instance because it offers a short term commitment with fixed costs. In other words, it gives her the ability to pay down her loans and the freedom to move at anytime.

Assuming you are in a financial position to own a home, when does renting make more sense? Renting provides lack of responsibility and increased freedom. Some examples: the burden of maintenance is largely assumed by the landlord and moving is always an option (although prematurely breaking a lease agreement forfeits your security deposit). Therefore the most compelling reasons for renting, in my opinion, are the freedoms it provides from the burdens of owning a home.

In many instances, the rent payment is one-third to one-fourth the cost of the gross monthly payment for a home (loan payment, property taxes, and maintenance costs). Consequently the savings incurred (versus owning) make sense when other financial objectives are more important, such as saving for a home, paying off student loans, or supporting family members. What happens when life throws you a major curve ball? Consider the following life changes: divorce, new job, death of a spouse, and transition to a new city. Renting may provide the optimal platform for dealing with these situations.

Finally, buying a home requires years to build equity and sell at a profit. The time requirement is often between 4 to 7 years, the commitment needed to build enough equity to cover selling fees (which total around 8%) and make a return on investment.

Conclusion

Renting makes more sense when

1. You are not staying for long ( 2 years or less) or
2. Other priorities are superior to the responsibilities of home ownership

Basically you pay for predictability. The downside is that your payments build someone else’s equity (as opposed to your own).

Additional advantages of renting:

1. Amenities that are unaffordable as a buyer are accessible as a renter. Many of today’s high end apartment complexes offer pools, spas, fitness centers and recreation areas.
2. Large complexes provide a sense of community. (Unfortunately I must disagree. My memories of UCLA apartments are of filth, dilapidated buildings and sleepless nights).
3. A long lease agreement (1-2 years) provides short term stability. Despite the fluctuation of housing and oil prices, rental costs remain fixed.
4. The price of entry is small. Just 2 months rent give the right to occupy a space.
5. The option to move is always available. Whereas breaking a lease agreement prematurely may cost $5,000 (the price of the security deposit), selling at the wrong time may cost $50,000 or more (if the home is sold less than the purchase price).

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