Do you fork over cash to a landlord in exchange for freedom of responsibility for residential maintenance, or take out a mortgage and shell out monthly for the pride — and the eventual financial payoff — of homeownership?
A recent study from Zillow, the online real estate service, shows that homebuyers nationwide face more challenges this year, with inventory down 6.5 percent from 2014 and home values up 3.3 percent over roughly the same period.
While the market appears to be in the seller’s favor, many still opt to buy for stability, tax benefits or some other advantage. As a financial planner, I often discuss real estate’s potential effect on a financial future.
There are plenty of reasons to buy and plenty to support renting a home. Below are a few considerations.
A home provides a place to live — stability for you and your family. When you own a home, you are no longer at the mercy of a landlord who changes terms or, even worse, sells the property. With each mortgage payment you also know you’re closer to outright owning that asset.
Among other good points:
—No surprises. While a leaky roof or broken water heater might catch you off guard, your monthly payment typically doesn’t vary. This helps with budgeting, cash flow and other aspects of a comprehensive financial plan.
—Tax benefits. As a homeowner, you can deduct many related expenses. And unless you owe more than $1 million, all the interest in your mortgage payment is deductible.
—Diversification. While real estate doesn’t always prove the best investment over a long time — often barely keeping up with inflation — it can serve as a great portfolio tool.
Just as you commonly invest in stocks, bonds, cash, certificates of deposit and the like through brokerage and retirement accounts, you can use real estate as another asset class that can help diversify your investing. Plus, as a tangible asset, real estate appeals to many other potential buyers and investors.
—Equity building and retirement planning. As a homeowner, you build your equity through paying down your mortgage over the years. If successful, you will likely enjoy a lower cost of living in retirement.
If you’re part of the population that’s unable to buy at this time, you have a few good reasons to rent.
—Flexibility. Maybe you prefer to move around, seeing new neighborhoods and cities; it’s hard to put a dollar value on that experience and enjoyment.
If you anticipate a career or job change renting might suit you better, as buying a home can hinder your flexibility to pick up and move.
—Avoiding homeownership costs. Homeowners are painfully familiar with such extra, unforeseen and often hefty costs as real estate agent fees, mortgage origination fees to start your loan, property taxes, moving costs, furnishing, decorating, leaky pipes, gardener wages — you name it. As a tenant, you enjoy the perks of your home without the worrisome financial burden.
—Liquidity. Generally, you can’t turn a house into cash overnight. Many people invest a lifetime’s savings into a home, putting the bulk of their net worth into an illiquid asset. Risk comes with tying up a large portion of your wealth in such an asset. Renting allows you flexibility and other investment options.
—Building credit. As consumers, we need a healthy credit for pretty much all we do, from getting a new cell phone plan to buying a car. While renting doesn’t boost your credit rating the same as owning a home, creating a history of on-time rental payments can, in some cases, help build your credit to qualify for a mortgage down the road.
This history begins when (and if) your landlord reports your payment data to credit agencies. Third-party services can help you report this information on your behalf.
Once your credit is solid, you can reevaluate if owning a home seems right for you.