Buying a home is one of the most important – and most expensive – decisions you will ever make in your life. No wonder so many Americans are hesitant to buy their own home, taking into consideration the high property prices, the sometimes unaffordable mortgages, and the state of the economy. Many smart people decide to rent a home or apartment instead of buying one, and it’s all for good reason.
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Why Buying a Home Is Not Always A Good Idea
- Buying a Home Costs a Lot of Money
Real estate properties can be expensive … very, very expensive. Depending on where you live, you might need to pay a seven-digit number in order to own a home. For example, according to data from Mashvisor, the average property price in New York City is $1,165,000, while the average monthly rent is only $2,900. This translates into a price to rent ratio of 34, and as someone wondering whether to buy a home or rent a property, you must know that a price to rent ratio of 21 and above means that it is definitely better to rent in this particular housing market. Similarly, data from Mashvisor says that the average property price in San Francisco is $1,669,000. Even with an average monthly rent of $4,780, the price to rent ratio of 29 shows that you should definitely be renting a property rather than buying your own home there.
So, the first reason why buying a home is not necessarily a good idea is purely financial. Renting is a far superior option in this case.
- Buying a Home Can Bring a Lot of Unexpected Expenses
Before buying a real estate property, a home buyer should sit down, carefully make a budget and analyze the rent vs. own dynamic. This budget should consider all sources of revenue as well as all one-time and recurrent costs. The revenue sources include the salary from your full-time job as well as any part-time jobs you might be working in addition to stock dividends or other sorts of investments. The one-time costs when buying a home are many and can vary: the down payment, the mortgage fees, the real estate agent’s commission, an appraisal fee, a survey fee, repairs and fixes, and the list goes on and on. The recurrent costs related to your new home include property tax, property insurance, condo fees if you buy a condo, repairs, furniture, appliances, maintenance, etc.
So far we’ve only talked about fees which are expected and which you are very well aware of, even prior to buying a home. However, owning your own home is a risky endeavor as you might run into many unexpected fees. Just to give you a few examples: the roof might start leaking, the water pipes might burst, in turn, flooding half your house, and property taxes might go up in your location.
You, as the home owner, will be responsible for covering these costs and any other unexpected expenses related to your home. If you do own the home, you can check out resources like this one on water removal and restoration — these can be a huge help when you’re searching for info.
So, before buying a home, you should consider carefully whether you have the contingency funds to cover all expected and unexpected expenses.
- You Might Need a Different Type of House
Let’s say you are a single professional nowadays, and a nice and cozy studio in the downtown area of a busy city like Chicago, close to your work and to various sources of entertainment is all you need to own a home. Well, a few years down the road you decide to get married, have a few children, maybe a dog or two. Needless to say, this studio will not suffice to accommodate for your new living needs. This means that you will need to sell your cozy studio (paying for all the fees associated with this process) and start a new property search and home buying process (once again covering all relevant expenses).
Well, things would be much easier – and cheaper – if you could just vacate the rental property where you live (the downtown studio) and move to a new rental property (a single family home in the suburbs).
The reverse situation might also happen. Maybe now you are making enough money to buy and own a beautiful 4-bedroom house, but you might not be that lucky in a few years (you may lose your job, divorce, etc.).
Thus, change in life circumstances – whether positive or negative – is another major reason why it might be a better idea to live in a rental property rather than to buy your own home.
- You May Need to Relocate
If you are just starting out your career or even if you’ve worked for a company for a number of years, you might end up having to move to a totally new location, a few thousand miles away from your current home. If you own your home, you will need to sell it and look for a new property to buy. If, on the other hand, you are renting your home, you can give the required notice to your landlord and move to your new location hassle-free.
All these reasons to choose to rent a property rather than buy your own home are valid and make a strong case. However, we’ve left the best reason for last:
- Investment Property?
Instead of buying your own home, you can buy an investment property. While buying an investment property is expensive too, your rental property will make money for you instead of just costing you money. Let’s have a look at the main reasons why it’s better to buy an investment property rather than a home:
Buying an Investment Property: A Better Idea?
- You Are Not Bound to a Specific Market
If you want to buy a home, you have to stick to the housing market where you live, which might be quite expensive as previously discussed. However, if you are buying a rental property, there is no limit in terms of location. You can invest in real estate in your own city or out of state. With the help of a heatmap and a rental property calculator, you can find a cheap real estate market with relatively high rental rates to make money in real estate. This money will help you pay your own rent and even provide cash for your other expenses.
Using a home sale proceeds calculator is a good idea when buying an investment property. It allows you to determine how much you can comfortably invest in a new property without overextending yourself financially. You can assess whether the rental income will cover expenses, including the mortgage, property management, maintenance, and taxes. Moreover, a home sale proceeds calculator can help you present a strong case to lenders by demonstrating your financial stability and available resources.
- You Are Not Limited to a Specific Property Type
If you are buying your own home, you will need to look for a property which suits your needs and the needs of your family. On the other hand, if you are buying an investment property to rent out, you can purchase any property type which fits your budget as a real estate investor and then find the right tenants for it.
- Your Tenants Will Pay Your Mortgage and Your Own Rent
As a real estate investor, you should always aim for positive cash flow properties. These are properties which generate enough rental income to cover the mortgage payments and any other expenses related to your investment property in addition to leaving extra cash for your pocket. This cash can go towards covering your own rent. This means that your tenants will not only be making your monthly mortgage payments but will also be paying some or all of your rent.
Maintaining a consistent positive cash flow from your investment properties requires careful planning and active management. Start with a thorough financial analysis before purchasing a property, calculating potential rental income and estimating all expenses, including the mortgage, property taxes, insurance, maintenance, and vacancies. Set competitive rents based on local market research to minimize vacancies. Moreover, diversify your real estate portfolio and seek professional advice to enhance your chances of consistent positive cash flow.
- You Enjoy Tax Deductions
Owning an investment property benefits from tax deductions as you have a real estate property and also run a business. This means you take advantage of depreciation, while also being able to ask for deductions on expenses related to your rental business.
Owning an investment property offers various tax deductions, including mortgage interest, property taxes, depreciation (spreading the property’s cost over its useful life), operating expenses (property management, repairs, utilities, insurance, and legal fees), travel expenses for property-related visits, home office deductions, advertising costs, interest deductions on improvement loans, casualty loss deductions for unexpected damage, and deductions for legal and professional fees.
If your rental property runs at a loss where expenses exceed income, you may offset other income, subject to limits. The Tax Cuts and Jobs Act introduced a deduction section for qualified business income from rental real estate, with specific criteria and rules to follow. Maintaining records and consulting a tax professional with expertise in real estate investments helps maximize deductions and ensure compliance with tax laws.
- You Can Grow Your Real Estate Investment Portfolio
If you succeed in investing in a rental property with high rental income and strong positive cash flow, in a few years you should sit on enough cash to be able to purchase another investment property. The more properties you have in your real estate investment portfolio, the faster you will be able to grow your business. That is to say that investing in real estate is a self-growing business which allows you to make more and more money. Once you are a successful real estate investor, you can buy your dream primary residence as well as a number of vacation homes.
Although you might have grown up listening about the importance of buying a home, this decision is not always the best one. In many cases, it is better to rent a property rather than buy your own home. This is particularly the case if you think you might have what it takes to buy an investment property and become a real estate investor with the cash saved from not buying your own home.
