Housing Market

A Lifestyle Decision

Are you considering the consequences of buy or rent? Are you wondering whether it would be beneficial to buy property rather than continue to rent? While each individual’s needs are unique there are some significant and key factors that should be taken into consideration when evaluating whether to buy or rent. Outlined below are some pros and cons of buying property as compared to continuing to rent space.

A Qualitative Decision

The buy vs rent decision is more than a simple financial one. Most rent vs buy calculators help you make a quantitative decision; i.e. they work out whether it will cost you less to rent or to buy. However, such calculators constitute only a minor part of the decision, because:

• There are often many hidden costs - such as repairs and maintenance, the cost of moving, etc. that are not included in many "rent vs buy" equations; and
• The rent vs buy decision is often not a quantitative one, but a qualitative one

Some common qualitative considerations include:

• Whether you need a better credit reference for future borrowing
• How much stress you are prepared to deal with if and when you move into your new home
• Whether your sense of independence or freedom is more important. Being an owner can give you a sense of financial independence, but being a tenant frees you from responsibilities that inhibit your freedom
• Whether you would rather spend or save
• Your retirement / pension strategy
• Desire for a ‘home ownership culture’ – seen as a sign of ‘social status’ to own property
• Investment planning for the future
• A legacy for the children

Pros and Cons of Buy vs Rent

Buying: advantages

• Owning property can be a good investment and builds equity: this yields far greater financial potential than leasing
• Any gain in value of the property will increase your capital
• Your mortgage repayment is likely to be similar to a rental payment on the same property on a long term basis
• Cultivates a sense of security and stability
• More flexibility: not dependent on landlord to maintain property

Disadvantages

• Owning property will initially cost far more upfront. There are property, appraisal, maintenance costs and responsibilities along with a large down payment and possible property improvement costs to factor into consideration
• Greater financial risk, risk of foreclosure and loss of equity governed by market conditions
• Any loss on the value of the property will decrease your capital
• If you own property you are less mobile than if you were to rent

Rent: advantages

• Less financial burden compared to an outright purchase
• Responsibility to refurbish and maintain property carried out by the landlord
• Flexible: more mobility
• Free-up working capital: with your money not tied up in real estate your ability to borrow funds will not be as limited as with buying property
• Exempt from rental overheads
• Smaller down payments rather than a large deposit and lower monthly payments but no resale value when contract expires
• There is no "resale" problem at the end of the lease period

Disadvantages

• No asset-value in the property - the landlord profits
• Variable costs: you may be subject to upward rental increments and higher costs at the time when your contract expires
• No equity: while renting you will be funding someone else's retirement
• All or most tenants will inevitably have contractual obligations towards their landlord

Conclusion: Landlord and Tenant

Property typically appreciates in value and can be a great investment over time, but ownership carries greater financial risk, financial challenges and management responsibilities that one can avoid by renting. Real estate is a relatively illiquid asset and is subject to market fluctuations; therefore, should the need arise to sell in a soft market that could also be a costly consideration.

By and large, personal and professional circumstances as well as lifestyle factors typically dictate the best way forward when deciding whether to buy or rent property. This is a complex issue, and involves a detailed assessment of your circumstances and requirements, the property you wish to acquire, and the offers that are available. Many of the buy vs rent factors can only be assessed by you, but having a helping hand from a real estate professional will assure you of making the best possible decision.

For further information, please contact The KeyPersons.