Deciding whether to buy or rent a home is a big decision, and we’re sure you’ve heard that renting is throwing money away, or some variation of this statement (e.g. when you rent you are only paying the landlord’s mortgage). In this three-article series we’ll examine various aspects of buying versus renting. You’ll discover the “right” answer would vary by personal preference and a mix of financial and emotional arguments. Firstly, let’s explore some of the general points you’ll likely consider.
Permanence vs Transience
A major consideration is deciding what kind of person you are: do you plan on staying in your home for a long time or do you prefer (or need) to roam? Buying a home can incur substantial upfront costs (deposit on loan, transfer taxes, various fees, etc – we’ll cover this in Part 2). If you prefer not to be committed to either a mortgage or a location (for example because your job or profession requires you to be mobile), it would be wise not to incur these costs frequently; you would be better off renting.
Your preference for a particular location could drive your decision. Specific locations could be attractive because of a shorter commute, better schools, a nice neighbourhood, proximity to family, and so on. Some areas could also considered “hot-markets” where properties are in short supply; prices are therefore high, making it unaffordable for the average person.
By choosing a predetermined location, you may be “forced” to either buy or rent depending on what is available.
Undesirable rental units
Some people choose to buy because of the sheer lack of desirable rental units. Generally rental markets in Trinidad and the wider Caribbean are not as developed as they are in North America, which could lead to inadequate protection for tenants. This could arise in various forms: unsafe units, unsanitary or rundown conditions, no formal lease or unreasonable lease terms, etc.
Given these conditions, people may deem renting not to be a viable option.
Desire to customize
Some persons wish to alter their home as they see fit, whether repainting, small renovations, changing interior designs, adding outdoor structures, etc. The benefit of owning is that you could make these changes without having to get approval from a landlord.
The reality is, owning a home could be a frustrating experience when faced with repairs and maintenance; however, with rental units, repairs are usually the responsibility of the landlord. Homeowners have to take care of burst pipelines, leaking roof, termite problems, and so on. And of course, homeowners bear the cost. Depending on your personality, the responsibilities attached to owning a home could make renting more appealing.
Some view the purchase of a home as either a form of forced savings or as an investment (a form of good debt – learn more in Good Debt & Wealth Creation.)
The idea arises because as you pay off your mortgage, the equity in your home increases. Equity is the difference between what you could sell your home for and what you owe on your mortgage loan. The savings are manifested by owning more and more of your home (your equity grows), whereas your mortgage provider practically owns the house at the start of the loan.
In addition, you are gradually owning an asset that has the possibility of appreciating in value, although the level of appreciation depends on many factors.
Prices also decline
The previous point about property appreciation needs an additional comment. One does not need to look further than the recent international financial crisis to recognize that housing market crashes do occur, and during the crisis, many people ended up having loans that were greater than the value of their homes.
But Caribbean housing markets seem to be structurally different than those in neighbouring North America, and although real estate goes through cycles like any other investment, we tend to experience price stagnation for a period rather than significant downward re-pricing. Of course, this is no guarantee for the future.
If you prefer not to rent during retirement, then you’ll need to purchase a home at some stage. This is an understandable strategy because if your retirement finances are not strong, the reduced income during retirement would make the fixed payments for rent unattractive.
Owning your home may also be a source of security and provide options in retirement. For example, you could partly realize the equity in your home by selling and moving to a less expensive house, or you may wish to leave your house as an inheritance.
The costs of homeownership can be high because of the various upfront and ongoing costs to be paid. In contrast, renting is generally cheaper for a comparable home in the same location.
Renting is also cheaper because you do not necessarily need to rent a complete house. Being able to choose a single room or smaller footprint can substantially reduce the cost of housing. Reducing the cost of living space could either help make it affordable or it can free up money either to invest or spend on enjoying life e.g. travel and entertainment.
Taking a mortgage to buy a home requires you make a downpayment, usually ranging between 5%-10% of the value of the proposed home. This could be a substantial sum and many choose to rent while they save for the deposit.
Low-income households may need to rent, as they may not qualify for a mortgage. If they wish to purchase a home, they often have to turn to government programmes that usually have a long waiting list.
As you can see,there are several points to consider when deciding if to buy or rent a home. In the upcoming Part 2 of this article we’ll look at the financial points in more detail.
We hope you enjoyed reading Part 1 and we’d love to hear from you in comments below if you have questions or comments to share! Don’t forget to check out Part 2!