The Common Sense Investor

Did you know that renting isn’t the only situation where you “throw money away”?

Often times, it’s a better idea to buy than to rent a home; after all, when you rent, that’s money that just goes away, while with a home you can accumulate equity. But many people don’t realize that owning a home can involve throwing away money as well. Not money thrown away on rent, but money used to pay for things like taxes, house insurance, mortgage interest, extra utilities, etc. Sometimes, the money you throw away when owning a home is more than you would have thrown away in renting.

For these reasons, its important to keep in mind that the decision between whether to buy or rent isn’t as cut and dry as you may have heard. Of course, there are some circumstances where our decision is forced upon us: if, for instance, you’re living abroad, some countries have laws against non-citizens owning property. Still, at The Common Sense Investor, we believe that in general, if you have the credit, it’s normally better to get in the habit of owning your own home. Here are some questions to ask yourself to assess whether you’re doing the right thing:

1. How long are you staying?

If you’re only going to be in an area for a short period of time, your closing costs and other charges and hassles associated with buying a home make it impractical to buy a house. And if you’re commuting in to stay in an apartment during the week, but own a house elsewhere, you may not have the resources to buy a second home. If, however, you’re staying in an area for more than a year and it has a healthy housing market, you’re probably better off buying a home.

2. Is it more cost-effective to buy a home?

In some areas, home costs are so high compared to rent rates that it’s impractical to buy a home; San Francisco, for instance. If you can’t afford to pay the mortgage, it’s makes no sense to buy a home. In fact, interest on your mortgage could even be greater than the cost of rent. IF this is the case, stick with renting, save toward a good down payment, try to find a roommate, and wait for the housing market to cool off. It will.

3. Is the housing bubble likely to burst here soon?

There are very solid signs in some parts of the United States and Britain that the hot housing market is starting to cool ““ more mortgage foreclosures, and fewer new homes being built. If you think you may be in this sort of area, wait a year or two before buying a home. Let prices reflect demand. It can save you thousands.

4. Even if you’re staying a short time, would a property be a viable rental purchase?

If you think you could run a rental property from a home somewhere else, buying a home in an area where housing costs are cheap could be a great investment. Not only will you have the rental income to help cover the mortgage, you’ll be accumulating equity while you own it.

5. How about a rent-to-own option?

If you don’t have great credit or don’t want to commit to owning a home just yet, you can sometimes work out a rent-to-own deal with the homeowner.

6. How able are you to care for a home?

It’s unfortunately a basic fact; a home is often more of a hassle than an apartment. If you don’t feel you are up to caring for a house, or you don’t want to waste time fixing plumbing problems, then by all means you should stay in an apartment or rental home. Do try to get a long-term fixed-rent lease, though, to guard against unpleasant surprises in the future.

One last note: if you’re renting, don’t forget to get renters insurance. If your apartment burns down or is destroyed, your landlord may not be liable for anything you own; at the very least, you’d have to buy a new wardrobe and basic necessities. Read the policy carefully before signing off, and make sure it covers all possibilities.