Should I Stop Renting and Buy?: The Millennial Conundrum

To Rent or to Buy?

What is the American dream? If you asked anyone that question twenty years ago, you would likely receive the answer that owning a home is the pinnacle of the American dream. Nowadays the answer to that question is not answered so assuredly, especially among millennials. Concerns over affordability and flexibility have come to the forefront and many people are questioning whether they should buy a house in the suburbs or continue to pay rent to freely move and live in whatever city they want. Many people, especially millennials, see homeownership as a fantasy in the wake of the 2007 financial crisis and staggering student loan amounts. But for other millennials, homeownership is a viable option to decrease monthly payments, pocket tax deductions, and achieve a greater sense of independence. The question of whether to rent or buy should consider a multitude of factors.

The first question to consider when deciding whether to rent or to buy is how long one plans on staying where they are. What many buyers do not consider are the costs associated with purchasing a home, which can include brokers’ fees, appraisal fees, title insurance, and mortgage origination fees. In addition to these fees, owners must pay capital gains taxes on the sale if the home is held for less than 2 years. Short-term ownership may also mean that the investment in a home is less meaningful as it does not have time to appreciate. In contrast, if one is planning on living in a home for an extended period of time, these costs get distributed over the years and the home has a chance to appreciate in value.

Though older generations have always believed that housing prices always go up, this belief was shattered with the collapse of the real estate market, and millennials may feel hesitant to face the same crisis their parents did. An important aspect to consider before buying a home is how one’s finances would fare with a home whose value increased slowly or not at all. By putting all your eggs in one basket (a home), there may not be much room to invest in other areas like a diversified investment portfolio of stocks and bonds. What’s more, if all of someone’s income is tied up in paying for a mortgage, there might not be enough cash flow to pay for emergencies or save for retirement or tuition. 

One of the most common reasons people decide to buy rather than rent is that they don’t feel as if they are throwing their money away on rent but rather are contributing toward an investment. Though the monthly mortgage payment may be less than monthly rent, it is important to consider the hidden costs of homeownership, like property taxes, insurance, regular maintenance, and unforeseen expenses. Having a low credit score can also result in a higher interest rate, which means that the house might need to appreciate in value more quickly than is realistic to have any hope of building up equity.

A common assumption is that by owning a home there will be additional savings on taxes, but this assumption should not be made so quickly. While it is true that mortgage interest can be deducted, as well as interest paid on home equity loans or lines of credit, but homeowners must itemize their tax deductions in order to receive the benefit, which is limited to a $750,000 cap. Another factor to consider is that the tax benefit may decrease each year because of mortgage amortization schedules, since over time one pays less interest and therefore receives a a smaller deduction.

The last thing to consider is personal preference. After calculating all of the costs associated with renting or buying, it is important to take into account lifestyle and values. For instance, if having a backyard and plenty of space to accommodate friends and family is important to you, buying in the suburbs could be the best option. On the other hand, renting monthly can afford the opportunity to be located closer to downtown metropolitan areas and the flexibility to move if careers change or one’s current location becomes tiresome.

Whether renting or buying seems more attractive to you, the Tamara Kucik Team is well-equipped to satisfy your needs. With our expertise, we can help you decide what your best options are and guide you on your journey to finding a new home. If your decision comes down to what is most affordable, take a look at this calculator that compares renting and buying in various cities at various price points:

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