The Big Question: Is it Better to Rent or Buy a Home?
Deciding whether to rent or buy a home depends on various personal and financial factors. Here are some key considerations for each option:
Renting
- Flexibility: Renting offers more flexibility to move without the hassle of selling a home.
- Lower Short-Term Costs: Generally, renting involves fewer upfront costs than buying (like down payments).
- No Maintenance Responsibilities: Most maintenance issues are handled by the landlord.
Buying
- Building Equity: Homeownership allows you to build equity over time, which can be financially beneficial in the long run.
- Stability: Owning a home provides a sense of stability and permanence.
- Potential for Appreciation: There’s a chance your property will increase in value over time.
- Tax Benefits: Homeowners often qualify for tax deductions on mortgage interest and property taxes.
Making a Financial Decision
If you are looking for a home for two to five years your investment in a home will almost certainly be the better financial decision right now.
But don’t take our word for it, here is the proof:
Let’s assume you want to live in Palm Desert and need a 1,500 square foot, 3 bedroom, 2.5 bathroom home and you want to know what is the better financial option – renting or purchasing a home.
| Example Home From Above Graph Details: (1,500 SqFt 3 Bed 2.5 Bath) | |
|---|---|
| Price of Home | $487,500 |
| Closing Cost (buy side) | $20,000 (est.) |
| Property Taxes | 1.50% |
| Down Payment | $17,063 (3.5%) |
| Annual Tax Increase | 2% /year |
| Interest Rate | 7.875% |
| Home Appreciation/Year | 5% |
| Repair/Maintenance Cost | $150/mo. |
| Cost to Sell | 6% commission & $20,000 closing costs |
| Monthly Loan Payment | $3,411 |
| Comparable Rent | $3,000 /mo. |
| Rental Increase per year | 3.25% |
This table reflects the cumulative cost of owning a home (including mortgage payments, maintenance, and property taxes, minus the home’s appreciated value and selling costs) compared to the cumulative cost of renting a similar property over the same period.
The table also shows a profit on a home in just 5 years of ownership, even after considering selling costs, the amount spent on loan payments, taxes, and maintenance. Even more interesting is that the cost to buy and sell a home in just 2 years is less expensive than rent. The loss on a home in year 2 would be $37,342, but compare this to the cumulative cost $73,073 to rent for 2 years and the savings becomes clear. This shows a total of over $35,000 less expense with owning a home versus renting.
Of course this data relies on a 5% appreciation, however the price of homes in the Coachella Valley has increased steadily at 5.5% per year in the past 20 years. Also, if you couple a housing shortage (low supply) in California with interest rates declining (increasing demand) you may see another surge in home prices outpacing this 5.5% rate in the next 2 years.
The fact is; if you are renting a home and plan on staying in the Coachella Valley for more than 2 years, financially it makes more sense to purchase a home rather than renting; even at a 7.875% interest rate!
If you are interested in how to take advantage of this market on the purchase or the sale of a home please call your Keller Williams Coachella Valley expert today at: 760-699-2969