In past decades, the decision whether to buy or rent a home could move from buy to rent and back again based on interest rates and market factors mostly. However, over the long haul, the consensus was that it was usually better to buy than to rent. Renting was often considered as throwing money away, since there was no equity being built over time.
In more recent times, there are other factors that have complicated the decision for many. Particularly for the Millennial generation and younger people, lifestyles are different, job longevity is shrinking, and the real estate crash back in 2008 took a lot of the luster from owning a home.
The Pros and Cons of the Comparison
Ownership allows more customization freedom
Renters are restricted from doing almost anything to personalize their rental home. They usually can only hang wall photos and art, and even then, with restrictions on how they can do it. They cannot make any material modifications to the structure at all. Homeowners can do pretty much what they want, though there may be some homeowner association restrictions about the exterior.
Ownership does build equity over time
Paying down a mortgage begins to build some equity value in the home, while rent payments do not. This is only an advantage though, if the owners will occupy the home for at least five to eight years. That length of time is usually where they find that they will break even on their purchase considering maintenance and resale costs. If younger potential buyers are moving frequently for job change, equity accumulation is minimal unless there is significant value appreciation in the area.
Owned residences can be improved to increase value
Along the same lines as personalizing a residence, homeowners can add to the size of a home, improve the floor plan, modernize kitchens and baths, or create outdoor living and entertainment areas. All these modifications can add value to the home, though some more than others. The renter can do none of this.
Owned real estate is considered an asset for personal net worth
Of course, this only applies if there is equity in the home. Over time, a homeowner can build equity to a point where it can be used to guarantee borrowing for improvements or other desired activities. The renter has no equity stake in their home place.
Interest and real estate taxes are deductible for income tax purposes
Mortgage interest, with some limitations based on location and regulations, is often a deduction from income for tax purposes, as are the real estate taxes paid on property. Again, renters do not have this advantage.
A home can be passed to heirs without capital gains
When homeowners pass, they can leave their home to heirs at its stepped-up value for tax purposes. This means the value is calculated in the current market. In this way, there will be no capital gains taxes on what could be significant equity in the home built up over time.
Though it can appear from these bullet points that it is almost always better to buy than to rent, for many that may not be the case. If mortgage interest rates are high and rents are low, or if the homeowners are not relatively sure they’ll be in the home for close to a decade or more, there may be little financial advantage in owning, considering maintenance and upkeep costs.
The renter considering buying should carefully balance these considerations with a realistic outlook for their current employment duration and their future plans.
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