- When buying a home, typical agent commissions are 6% of the home’s value, which can be a four- or five-figure expense.
- Moving to a new home often requires hiring movers or a moving truck rental, amongst other costs to get settled.
- In a situation where you think you will only live somewhere for a few years, you may be better off sticking with renting instead of buying.
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Homeownership is a great feeling, but sometimes the numbers just don’t make sense. Buying and selling real estate is an expensive endeavour, so if you plan to move frequently or want to pick a home for the short-term, buying probably isn’t the best choice.
While you don’t build any equity when renting and have less control over your home, there are several big financial benefits of renting if you live in a home for just a few years. Here’s how to decide if you should rent or buy based on how long you plan to stay put.
Typical home purchase costs
If you are looking to buy an average $US250,000 home, you’ll wind up spending a lot more than just $US250,000. In addition, you’ll have to grapple with the closing costs charged by real estate agents, your lender, title company, local government, and other interested parties.
The biggest transaction cost is often the real estate agent commission. Traditionally, this 6% fee comes out of the seller’s proceeds and is split evenly between the two agents. In some cases, you can hire a realtor or agent who charges less than 3% or is willing to give part of their commission back to you as a discount on the home purchase.
For a $US250,000 house, that’s $US15,000 in fees to get the ball rolling. But wait … there’s more!
Other closing costs include inspections, appraisals, and loan closing costs, as well as fees for document preparation, credit reports, title insurance, and recording the sale with your city or county. Closing fees usually add up to around 2-5% of the home price.
The costs will vary based on the price of the home, where you live, and the service providers you or your bank choose. While these costs are all common, it is important to go in with your eyes wide open.
Other added costs of owning a home
When you rent a home and a pipe breaks in the middle of the night, it’s a hassle, but the landlord will ultimately foot the bill. If you own a home and the same situation happens, you have to pay for everything yourself.
Costs above what you pay for renting include homeowner’s insurance (more expensive than renter’s insurance), repairs, private mortgage insurance if you put down less than 20%, a mortgage payment (may be more or less than rent), property taxes, and potentially homeowner’s association dues and assessments.
These costs can be a big surprise to some first-time homeowners. Factor in an estimate for these costs before you go down the road of buying a home.
Find your break-even point for renting vs. buying
To decide if you should rent or buy, go through a few steps and run the numbers to decide where you’re better off. Of course, you’ll have to estimate and guess in a few places, but this exercise could save you thousands of dollars depending on where you live and what you typically spend on housing.
- Figure out how long you will live there.First, you need to know how long you’ll live somewhere. If you plan on just a couple of years in a city or area, you are most likely better off renting. The longer you stay, the more favourable it is to own versus rent.
- Estimate the recurring costs of renting. As a renter, your recurring costs are likely rent, renter’s insurance, and utilities.
- Estimate the recurring costs of buying. As a buyer, you’ll want to count on paying your mortgage, property taxes, homeowner’s insurance, utilities, and home maintenance.
- Estimate one-time costs for renting and buying. As a renter, one-time costs are usually limited to application fees and maybe losing part of your deposit. As a buyer, you have to pay for some major transaction costs. Moving expenses are similar either way.
- Calculate the difference. Add up everything in the buy and sell columns to see which number is bigger. Divide one-time costs by the number of months you plan to live somewhere to get an average cost over time.
Follow the numbers, not the rhetoric
There are many people who strongly believe renting is better than buying. Others say buying is always best. In reality, there is no best answer for everyone, and what’s best for you may change over time. If you do the maths, you know you are making the most educated financial decision. That’s the best way to decide where to live next.