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Does Renting Make Sense for You?
Right about now, you may be saying to yourself 'ERA is a global network of real estate offices. Of course they're going to tell me that owning a home is better than renting.'
Well, almost always. ERA has been successful at helping to bring home buyers and sellers together precisely because most people find the notion of owning their own home compelling for a wide range of reasons, both financial and emotional. That's why home ownership rates in America have remained at a near-record level of just under 70% for the last several years, and why home ownership continues to be a core component of achieving the American Dream.
Renting can make sense for lots of folks, particular those who plan to stay in an area for a short time. You're the ultimate authority when it comes to knowing whether home ownership is right for you; the following is some food for thought that we believe can help you make an informed decision.
Much of the confusion that surrounds the wisdom of owning your home versus renting comes from the popular notion that a home should be viewed purely as an investment, the same way you would view a stock, bond, IRA, etc. There's some truth to that notion, but just as stocks, bonds and IRAs differ from one another, one's personal residence is a unique investment "instrument." Here a just a few of the characteristics that make home ownership unique:
A Mighty Big Lever – Owning a home affords a powerful way for you to leverage your capital. The purchase requires a relatively small down payment, yet your return is based on any increase in the total value of your home, amplifying even a seemingly modest rate of appreciation.
Opportunities to Add Value – Thanks to differences in the efficiency of the financial markets versus the real estate market, the purchase of a home offers you opportunities to add value that are not available to you when you purchase stocks or bonds. While you're competing against thousands of savvy investors in the financial markets, you may be competing against a relative handful of potential buyers for a given property.
Combine the use of the Internet-based research tools and the services of an ERA real estate professional, and you have the power to be the buyer who finds the motivated seller with the attractively priced property, increasing the likelihood of equity appreciation from the day you move in.
If you're an enterprising, creative buyer, put online information resources and the experience of an ERA real estate professional to work for you to find the 'diamond in the rough' that's waiting for your special touches to improve the property, increase your enjoyment while you live there, and add to resale value.
Equity Loans for the Short Term – With credit card interest often exceeding 20%, a home equity loan can offer a lower cost, flexible tax deductible alternative. Note that, as with the assumption of any debt, home equity loans call for financial discipline on your part.
Liquid(ity) Refreshment for the Long Term – Financial markets are highly liquid; your investments in stocks or bonds can be sold in seconds. Selling a home takes a bit longer; that's not a good or bad thing, just something you need to be aware of when you find yourself thinking of your home in the same investment terms as a stock or bond.
The difference in market liquidity also helps explain why trends in real estate values tend not to exhibit the (sometimes extreme) spikes of the financial markets; and why you shouldn't stay awake at night trying to 'time the market' when it comes to real estate.
Take a (Tax) Break – Home ownership can offer significant tax advantages over renting:
- If your mortgage balance is less than the price of your home, mortgage interest is 100% tax deductible.
- Real estate property taxes paid on your primary residence (and in most cases, on your vacation home) are 100% deductible for income tax purposes.
- If you are a first-time homebuyer with an IRA, you may also be able to apply a portion of your IRA to the purchase of your home with out penalty.
- If you have lived in your home for two of the past five years, you can exclude from capital gains on the profit from the sale of your home up to $250,000 for an individual or $500,000 for a married couple, without restriction as to your age.
- You can exclude the above capital gains thresholds from taxes every 24 months, which means you could sell your home every two years and pocket the profit (subject to the limitations above) tax-free every time – serial renovators, take note.*
*Consult with your tax or financial advisor for details.
Here's where it gets very tough to look at the cold hard facts of renting versus owning a home of one's own. For most of us, home ownership is as much as an emotional decision as a financial one.
If it's important to feel a deeper connection to community, in a space that's yours to do with as you will, without the hassle of landlords, and the hassle of new people moving in and friends moving out on the first of every month, you've already made your decision.
Make use of the information resources on the Internet (including ERA.com), talk to your friends and your financial adviser. If you're not sure that you'll be staying put for a while, consider renting for the short term.
When you decide to buy, buy a home that meets your needs at a price you can afford; not just because you believe it's a good "investment," but because the tangible and intangible advantages of home ownership (some of which we've outlined here) make sense to you.
And when you need the advice of a real estate professional, we hope you'll speak to an ERA representative in your neighborhood – we really are "Always There For You."™
