Buying vs. Renting: Pros and Cons for First-Timers
When it comes to renting vs. buying, we want to encourage you to opt for owning real estate as soon as possible and as sensibly as possible. Yes, this is Aalto — the self-service real estate platform — and not a rental site, but all bias aside, it's our focus as advisors to help you reach your goals.
Owning your own home is one of the best ways to build equity. Plus, people who have more experience purchasing and owning real estate have a much better understanding of how to build their equity and plan for their future.
But home ownership might not be the right fit for you, and that’s OK. If you are wondering about the pros and cons of buying vs. renting, then this guide is for you.
Is There an Advantage of Buying vs. Renting?
When it comes to buying vs. renting pros and cons, buying a home has many advantages, ranging from the chance to build equity to tax benefits. Here’s an inside look at the top pros of buying a home.
Buying a house provides homeowners with the chance to build equity and can be a good investment. When it comes to real estate, equity refers to the amount of your home you own versus how much you owe on the mortgage loan. For example, if you owe $200,000 on your mortgage loan and your home has a market value price of $800,000, you have $600,000 of equity in your home.
Homeowners can build equity two primary ways — by paying the monthly mortgage payment and by the home appreciating over time. However, your home’s equity can decrease if you borrow more against the home or fall behind in mortgage payments.
The return on your investment should not just be seen through a financial lens, but an improved quality of life, too. Consider:
- Historical value of homes in the area
- What the current market dynamics are
- Your current lifestyle
- The life you want to live
- The condition of the property
- Potential costs you will have after you buy
If you keep coming back to these key components, you are more likely to make a sound decision. If you take a calculated approach and you take care of your asset, a home is a solid place to build equity.
While homeowners are required to pay property taxes, they can also look forward to receiving tax benefits as a result of owning a house. You might qualify for a tax deduction, which is money back on your tax return. Tax refunds can span from insurance payments to claims on the house to home improvement expenses. You might even receive an extra tax refund if you’re a first-time homebuyer.
More Privacy and Freedom
When you own the home, you’ll be able to call the shots and use the space as you see fit. For instance, you won’t have to worry about putting nails in the wall or if you decide you’d like to add a pet to the family, you can do so without consulting your landlord.
Additionally, you can enjoy the privacy that comes with owning a house. When renting, landlords generally do have a right of entry, which is for repairs, alterations, or renovations. As the owner, you no longer have to answer to them.
What Are the Cons of Owning a Home?
So, what are the three disadvantages of owning a home? Keep in mind these cons of buying.
Saving for Down Payment
Probably the biggest downside to home ownership is the chunk of money you’ll spend up front to get that coveted equity. In order to obtain a loan, you’ll be responsible for paying a down payment on the house. The down payment you’re required to pay varies from lender to lender. However, if you put down a 20% down payment, you will avoid paying Private Mortgage Insurance (PMI).
Paying Closing Costs
In addition to the down payment and home’s purchase price, homebuyers are also responsible for paying closing costs and upfront costs, which include the following:
- Home appraisal
- Title search
- Attorney fees
You’ll also need to budget for ongoing costs, such as property taxes, homeowners insurance, and utilities. If you’re purchasing a condo or a townhome, then prepare to pay homeowners association fees. A homeowners association (HOA) is typically run by resident homeowners who oversee the implementation of rules and guidelines to ensure that the neighborhood is running efficiently. Homeowners will need to factor in other housing costs, such as upgrades and upkeep of their home.
We can’t stress this enough — make sure to buy a home that is manageable. You want to keep all these extra costs in mind when making your budget. Where you don’t want to find yourself (and where we never want to see our clients) is in a situation where you are maxed out with your mortgage.
Think about whether this is a 5-year home or a 10-year home. Your planning may adjust accordingly, especially depending on the market dynamics in which you are buying.
Just as you formulated a plan to purchase your first home, you want to develop a practice of updating and reevaluating your home ownership plans on a regular basis — is it time to refinance? Should we save for a renovation? Is it time to sell? Having a team of trusted advisors will help you now and at every stage of your real estate experience to make this downside totally manageable.
Navigating the Housing Market
One of the potential disadvantages about buying is that the real estate housing market and interest rates can fluctuate, posing challenges for potential buyers looking to enter the market. Current market conditions, and whether it is a buyer’s market or seller’s market, can influence the buying process. For instance, a seller’s market means that there is a low supply of inventory and a heightened number of buyers, which can lead to increased home prices.
Make sure you partner up with trusted advisors like Aalto. Our team has been navigating the housing market for decades. We provide you with on-demand access to all home info and expert pricing analysis for any home on our exclusive platform.
Is There an Advantage of Renting vs. Buying?
Now that we’ve reviewed some of the top advantages and disadvantages of buying, read on for some pros and cons of renting a property instead of buying it.
Renting makes sense during certain life cycle stages and especially in those post-college years when you set out to develop a career and build personal equity. Renting pops up at other times when something short-term and flexible creates a practical solution.
But here’s the problem with renting — you’re not building equity for yourself. You are paying to build that equity for someone else (your landlord) and you are putting money towards rent that could go towards a down payment. Ultimately, renting equates to a convenience equation until you are in a position when it is practical and affordable to purchase your own home.
No Maintenance Costs
It’s up to homeowners to pay for repairs and renovations that need to be done. However, a perk of renting is that renters are not required to pay maintenance costs or repair bills. For example, if your fridge needs replacement or if you have a leaky ceiling, it’s the landlord’s responsibility to resolve this and pay for any repairs.
No Property Taxes
In addition to not needing to pay for a down payment, a major pro is that renters don’t have to pay property taxes. Homeowners are required to pay extra taxes based on the value of their house. The percentage is calculated by the local government, so the rate can vary by type of property and local laws.
Renters, on the other hand, are off the hook. They don’t pay property taxes, but they also miss out on the tax benefits homeowners get.
What Are the Cons of Renting vs. Buying?
While renting a property has plenty of perks, be sure to carefully consider the disadvantages of renting.
Unexpected Rent Increases
Your monthly rent might increase at any time, for any reason the landlord decides. While some cities implement rent control to keep rent raises at a certain percent, this does not apply everywhere. Without a rent-stabilized apartment, your landlord can increase your rent payments however they see fit.
Increased rental payments might be difficult depending on your financial situation. In the worst cases, renters need to move out with very little warning to find an apartment that’s in their budget.
Circumstances May Change
While renting a house offers flexibility, it does not guarantee stability. There is no permanence with a rental as you are most likely re-signing your lease every 6-12 months. Because you don’t have rights to ownership, your landlord can evict you after issuing a 30-day notice.
How Do I Know Which Option Is Right for Me?
Although buying vs. renting is totally up to you, here are some guidelines to follow if you feel stuck.
Look at Your Unique Situation
Ultimately, the decision to buy versus rent depends on your needs, your goals, and the stage of life you’re in.
If you’re not planning to stay where you are for longer than five years, then renting a house might be the better option for you. If homeownership is on the long-term goals list though, start saving and strategizing now.
Maybe you want to buy but you’re nervous about affordability and repairs as a first-time homebuyer. Instead of giving up on the dream, check out townhouses and apartments versus a single-family home. They’re cheaper and often easier to maintain than, say, a three-bedroom single family home. You don’t need to get into your forever home right away!
Check Out at the Current Real Estate Market
The state of the current housing market can influence whether it’s a good time to buy or whether you’re better off renting. For instance, a seller’s market can be a challenging time to buy as there are highly competitive conditions and low housing inventory. This can lead to bidding wars as potential buyers compete with each other to gain ownership of a home.
That doesn’t necessarily mean you have to wait it out in rental purgatory. It could just mean you’ll have to be strategic about your offer or make a few compromises on your list of requirements. Understanding current real estate trends can help you decide whether you should move forward with buying or wait.
Put Some Feelers Out
If you think owning isn’t possible now, we highly encourage you to establish a relationship with a financial advisor to put together a plan for managing your finances and goals for your various life stages. Take the steps to get pre-qualified for a mortgage and you might just find that your mortgage payments are more affordable than renting (especially when considering rent in and around the Bay Area).
Find Your New Home With Aalto
Now that we’ve examined the pros and cons of buying vs. renting, you’ll be better prepared to make the right decision for you. While renting can provide many great benefits, purchasing a house provides a way for homeowners to build equity and generational wealth.
Whether you’re interested in learning more about the real estate market or are ready to start house hunting, Aalto is there to guide you through the homebuying process — so you won’t need to hire a traditional real estate agent to obtain homeownership. At Aalto, our innovative platform provides buyers with access to ~30% more listings than any other site, insider information on any home, and up to 1.5% cash back when you buy.
Having access to all details of a home and being able to see more of the market will set you up for success with one of the most serious and sizable assets in your portfolio. Having a plan in advance of your homebuying journey will position you well to make sound, well-timed, lucrative investments that can begin building equity in your portfolio.
At Aalto, our talented team of experts are also available to answer questions and provide guidance through the homebuying process, starting from when you’re shopping for houses to when you receive the keys to your new home. If you’re ready to start looking for your dream home, get started on Aalto today.
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.