RENTING VS. BUYING: WHICH IS THE BEST CHOICE FOR YOU?
Buying a home for many is one of the largest purchase decisions we will ever have to make. It affects our lifestyle, finances, way we see the world, our flexibility, and our futures. On the same note, it can also be one of the smartest decisions we can make. Understanding the difference, benefits, and shortcomings to homeownership is critical. Los Angeles actually has the fourth-highest percentage of renters in the country! But with all the recent political and market changes, it’s important to understand how the debate has been affected, and what makes most sense for you.
BENEFITS ON BOTH SIDES, WHICH RESONATES WITH YOU?
When deciding between renting or buying, there’s more to consider than just the numbers - It’s truly a decision where all sides of the equation need to be weighed out and considered. While in most cases it will always be a best case scenario for prospective buyers to put down at least 20% of a home’s value to secure ownership in a new home, it is also important to consider the lifestyle implications of home ownership. Are creative freedom and flexibility of primary importance? Are home projects, upgrades, and renovations exciting or is the simple thought stressing you out already? Do you see yourself jumping from job to job, career to career, or city to city in the next 5 years? To help you better answer these questions, we’ve pulled together seven key points that you should consider before buying or renting your next home.
// GW Design
1 BUILDING EQUITY OVER TIME
Equity, put simply, is the value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments or leins. The ability to amass equity is perhaps the single most critical factor in determining whether to rent or buy a home - additionally, many families and individuals consider their equity as their most important investment for their future.
Equity gives homeowners the complete advantage over their home and apartment renting counterparts. Every month, when owners pay their mortgage, their payments are divided into covering their loan interest and their principal. In the early stages of home ownership, the majority of the owner’s monthly payment goes towards paying down interest, while the remainder is allocated towards paying the principal. However, this dynamic shifts as time goes on, almost exponentially as the interest is paid off. When a point in time comes where most of the interest is paid down, the majority of the monthly payment will then go towards the principle. Every dollar that is paid towards a home’s principle, represents a dollar of equity (which is actual ownership of the property). Over time, as the market value of the home increases due to market trends, or improvements, equity increases in a home as well. Many areas in Los Angeles are experiencing record breaking rates of growth. Once an owner achieves 20% equity, or an 80% loan to value (LTV) ratio, the home will then be eligible for refinancing to either take a loan against the home’s value, and/or to lock in a longer repayment window or lower interest rate.
2 FREEDOM TO RELOCATE
The ability to relocate and travel for extended periods of time on a whim, is another critical factor to consider. Angelenos should take a step back and look to their lifestyle, not just today, but they should consider their one, three, and five year plans to determine whether renting or buying makes the most sense for them.
The freedom to relocate is easier for renters who are only tied to their homes only for as long as their leases dictate (or even less, if their lease terms allow them to find a sub-letter). Unlike homeowners, who are committed to their home until their mortgage is paid off or they decide to sell, renters are only bound to their homes for a year or less depending on what is agreed upon and what they committed to in their lease agreements. For those who are looking to stay in a specific area for fewer than three years, renting is in most cases the wiser choice (as a primary residence). Renting also typically makes more sense for those who have a more nomadic, on-the-go lifestyle, that travel frequently, or like a change of pace, and do not spend much time at home. If you are certain, however, that you are going to stay in a particular area for 3-5 years or more because of work, family, or other life commitments, home ownership may be the more lucrative option.
3 EXPOSURE TO THE REAL ESTATE MARKET
Differing levels of exposure to the real estate market may also play a major part in deciding whether to rent or purchase a home – especially in more volatile markets.
Limited exposure to a turbulent and volatile real estate market has always been an advantage for renters. Unlike owners, whose home values rise and fall, short term, in ever changing markets, renters don’t face as much uncertainty. In markets where home values can widely fluctuate, landlords usually cannot increase rent until the lease is over, and they are also limited (in most cases), by how much they can increase rent year-over-year. Recently, rent prices however have been increasing to levels unlike we’ve ever seen before. On the flip side, if you are living in historic areas such as Beverly Hills, Santa Monica, West Hollywood, or DTLA, there are rent control laws that are in place that throttle landlords from increasing rents drastically over time.
4 COST OF MAINTAINING A HOME
Owning a home does come with a few hidden costs, such as maintenance and periodic updates. In order to preserve the functionality of a home, it is important to stay on top of keeping things clean, functioning, and stylistically up-to-date. Taking preventative measures in maintaining your home, and addressing issues early can end up saving you time, stress, and money in the long run. Having a realistic understanding of these hidden costs can give you the upper hand during your home search.
For renters, when something goes wrong in the home that you’re renting, taking care of the problem is as easy as calling your landlord or property manager. Whether there is a plumbing issue, a creaking door, a leak, or a broken lock, renters are never responsible for home maintenance (within what is considered normal wear and tear). On the other hand, homeowners are responsible for every bit of maintenance and repair pertaining to their home. In come communities or condo/townhouses, Home Owners Associations (HOAs) exist to maintain the community, and sometimes the exterior features of the home - in these cases, the HOAs will charge a monthly/annual cost to the homeowner. Depending on how old a home is, and how well it has been maintained since it was built, the costs of keeping up a home can become significant. This is one of the reasons why inspecting a home in the escrow process, prior to closing is so important.
5 CREDIT STATUS
Credit is another factor that needs to be considered when deciding whether to rent or buy a home. Both purchasing and leasing, have very different requirements, and depending on how strong your credit history and record are, especially if you are early in your credit development, will determine your eligibility for home ownership.
The credit requirements in place for renters are significantly looser compared to what is required to buy a home. Most experienced landlords require prospective renters to provide/undergo a credit report check which takes a look at the individual’s credit score and history. Most of the time, as long as a credit report does not demonstrate a history of bankruptcies, judgements, or significant debts, qualifying for a home to rent (within your income range) should be pretty straightforward. For owners, on the other hand, the credit requirements for obtaining a mortgage are much more strict - which makes sense in that there is a lot more risk on the line on behalf of the lender. In most cases, credit scores ranking below 680 or 700 are considered subprime, and can disqualify prospective owners on the spot (there are some exceptions however). Some lenders offer services, whereby they can work with you over a few months, or longer, to strategically improve your credit, thus allowing you to qualify for a home, or qualify for lower interest rates.
6 CREATIVE FREEDOM
There is something that I always communicate to some first time home buyers, and other clients that I work with that comment on a particular style or feature of a home that they do not like. There is a clear difference between renting and buying, which is, when you rent a home or an apartment, it is not yours, and therefore you have to return it in the same way that it was delivered to you. This is not the case when you buy a home, actually quite the opposite. Depending on your level of creativity, and determination, the ability to design a space may significantly impact your decision to lease or buy.
Because renters are hindered by pretty strict allowances, in terms of what is and what is not allowed when it comes to modifying, decorating and designing their spaces, home owners definitely have the upper hand here in terms of more creative freedom. Whether you’re looking to make minor changes such as swapping carpet for hardwood, or painting a bathroom, or major changes, like adding a story, knocking down a wall, or digging a pool, an owners options are nearly limitless within the confines of the law.
7 TAX BENEFITS
Tax benefits are a serious perk that many often overlook when deciding between renting and buying a home in Los Angeles. Tax benefits are even more significant, in the more historic areas of Los Angeles. Only homeowners, not renters, are able to qualify for these reaping tax benefits. It should be noted however, that simply owning a home does not automatically qualify you for tax benefits - In order to get a complete sense of how and what you can qualify for, we recommend that you consult a financial expert. The benefits can easily add up to tens or hundreds of thousands of dollars in savings, or more!
STILL ON THE FENCE?
If you’re still unsure about which decision to make, between renting or buying, connect with us here to speak with an expert in your area: Contact Us.