Leasing vs. Buying — What Are the Pros and Cons?
Most of you are probably familiar with the term “American Dream”. Invented by historian James Truslow Adams in 1931, the American Dream is the national ideal that people enjoy equal opportunities to achieve success and prosperity through hard work. Simply put, you work hard, you start a family, and you enjoy true happiness and success. That’s the American Dream. It often involves homeownership, as owning a home, to many people, means stability and wealth.
The American Dream, however, has since changed as the U.S. society evolves. Now, if you ask a 20-something, s/he might tell you that renting is better than owning, and in fact, he/she is not looking to buy at all! How did homeownership lose its share in the American Dream? Well, thanks to the rising home prices and the financial crisis of 2007-08, the one that left us so many scars that some of us still have not recovered from.
So, should you rent, or should you buy? That is the question. To answer it, let us go through some of the pros and cons of buying vs. leasing.
Pros of Leasing
1. Property taxes? HOA fees? Mortgages? Homeowners Insurance? None of these matters!
When you lease from someone else, all you need to do is pay your rent and utility bills on time. You might also get a renter’s insurance policy if you are super cautious and if your landlord requires you to get one. But other than these three things, you do not need to pay anything else unless you ruin the house. Your landlord, on the other hand, has to put money aside for property taxes, homeowner association fees, as well as mortgage repayments.
2. Want to pack up and leave? You got it!
If you are unsure about where you want to leave in the next five years, or if you simply get bored after staying in the same place for too long, then renting is the way to go. As long as you fulfill all responsibilities listed on your lease accordingly, you will be able to pack up and leave at the end of your lease. No strings attached.
3. Have no interest in learning how to manage a home? It’s okay!
All properties need maintenance and repairs. When you rent, your landlord takes care of most of the tasks. When you own, however, you are the one who has to manage the property yourself. If you are not super handy, you might even end up paying extra money hiring electricians, plumbers, etc.
4. You enjoy more flexibility with your cash and resources.
As long as you pay your monthly rent and recurring expenses, the rest of your money is yours. You can keep it in your bank account or spend all of it on a Tesla Model 3. In other words, you enjoy more freedom when you don’t have financial responsibilities to fulfill like owning and keeping a home.
Cons of Leasing
1. Have you actually calculated how much rent you’ve been paying?
Depending on where you are, your rent could range from $500 and all the way to $5000 and more. The truth is if you are spending thousands of dollars on renting, you might as well buy. At least you increase your asset instead of just giving your money away.
2. Bad news, your landlord is selling the building.
Things happen. Just when you are growing attached to the property, the neighborhood, and friends, your landlord tells you that they are selling the building and whether you can stay or not depends purely on the new owner’s discretion. You might be forced to leave, no matter how long you’ve been living there. Sounds very sad, doesn’t it?
3. The place you call home is not yours.
At the end of the day, we all want to have a place where we feel we belong to. Some people do enjoy the excitement of not knowing where they’d be in the next year or so, but most people do prefer stability in life. When you rent, the place you call home is not yours, and that statement alone adds a lot of uncertainty to your lifestyle, not to mention actually having to deal with moving, signing new leases every couple of years, etc.
Pros of Buying
1. Say, your home appreciates.
When your home appreciates, and your mortgage repayments remain the same, cha-ching! Chances are that you will be able to make a fortune when you sell the property, especially if you are in a booming housing market.
2. The potential rental income can be very helpful.
If you have extra rooms in your home and you do not mind the idea of sharing space with strangers, the potential rental income can be very useful! In markets where housing prices are high, many landlords actually break even by renting out their properties. Even if you only rent out one of the rooms, the additional cash helps.
3. You actually own the place where you call home.
It is human nature that we want to own things, and there is perhaps nothing better than owning a place where you call home for most people. No one can evict you and you will not be forced to leave your home sweet home as long as you make loan repayments on time.
4. Tax credits help offset your living costs.
While homeownership can be expensive, the government does offer tax credits, alleviating some homeownership burdens. For instance, owners may be able to deduct mortgage interests, certain expenses related to the property, and property tax payments from their federal taxable income.
Cons of Buying
1. You need a lot of cash to get into homeownership.
Think about all the things you have to pay for before even getting the key to the house – down payment, inspection, mortgage origination fee, etc. After you finally own the property, the challenge is then all about whether you can keep it. Property taxes, mortgage repayments, homeowners insurance…, all of these can make you cash poor.
2. Think you know how tricky owning a home can be? Well, be prepared.
Aside from all the annual and seasonal repairs and maintenance tasks you are aware of, as a homeowner, you also have to be prepared for the unexpected. Maybe your home is damaged in the flood following a category 4 hurricane, or maybe your neighbor accidentally tore down the party wall you share. Be prepared.
3. A lot of your equity is locked in with the property.
When you own a home, you are less flexible with your money. Many homeowners in the U.S. are actually home rich cash poor – most of their money is in assets, and they have no enough cash to make major purchases or investment. Of course, refinancing is always an option, but it definitely makes things a bit trickier.
4. The fear of getting foreclosed is real.
If you make a lot more than required and you have a healthy debt-to-income ratio, then making loan repayments on time might not be a thing at all. But what happens when you accidentally lose your income source and you start missing the repayments? Well, your home gets foreclosed, and you lose the love of your life forever.
The debate over owning and renting has been on for decades. At the end of the day, it is about who you are and what kind of lifestyle you want. While there is no perfect answer as to which one is better, we do hope to shed light on the topic by going through some of the pros and cons. If you plan to rent, be sure to work with someone you can trust, and calculate how much rent you can afford before starting your search. If you plan to buy, it is time to start saving $$$$!