To Rent or Buy?

With real estate prices being what they are, many homeowners are wondering whether it might not be wise to sell the house and cash in on their investment. Is this a good idea? Surprisingly it might be.

Renting has always had a bad reputation, and has been seen as a money hole. You pay money month after month and get nothing in return. For many people, though, it might be a great savings. Over the past five years, real estate prices have doubled in many places, while rent has remained more or less constant. These days, renting in places like New York City, Los Angelis, and Washington DC costs as little as half the price of buying. By selling your home, thus freeing up a great deal of money that could better be invested elsewhere, you may be able to save a great deal. Is this the best idea for you? Read on.

Many established families will quite understandably not want to rent at all. They enjoy having a house and having the freedom to do what they want with it. They enjoy having a yard that their kids can play in, and would not want to give it up. Moving would be a big hassle for them, and besides, renting an apartment would deny them the security of ownership.

For somewhat more mobile people, however, renting may be a good option. If you want to live in a city, for example, it is almost always cheaper. A 1,000 square foot, two bedroom condo in Manhattan's Upper East Side would sell for around $1.1 million, which translates to monthly payments of $6,000, while leasing for around $3,700 per month. Clearly, renting would be cheaper in this case. A good rule of thumb to use when considering which would be cheaper is to compare the annual price of renting to the price of purchase. If the ratio is over 20, renting is the way to go. In this case, the ratio comes out to be around 25, which is consistent with the average for most east coast cities.

Another rule of thumb to consider is whether you plan to live in the same place for more than five years. If your answer is yes, you should probably buy, but considering that the average American family relocates every six years, there is a good chance that you will be moving before then. If you are, though, real estate prices probably would not rise enough to justify buying. In New York City, for example, real estate prices would have to rise 13% in the next five years to make the investment worthwhile.

Other factors to take into consideration include costs associated with owning a home. If you buy a house, you have to worry about repairs and upkeep, taxes, insurance, and, most importantly, your mortgage. Although many people point out that mortgage-related tax credits constitute a good reason to buy, the reality of the matter is that even with tax credits taken into account, your mortgage will still end up increasing the price of your home to almost twice its value. If you rent, however, your only costs are renter's insurance and the actual cost of the rent.