Buy vs. rent: Pay yourself or stay flexible

It’s the eternal dilemma: Should you rent a house or an apartment or should you take the plunge into homeownership and buy a house?

The reality is that there is no simple answer. What’s right for your friends may not be right for you.

Here are some common questions that I am asked frequently:

Q: How can we know when it’s best to rent and when it’s best to buy a house or a condo?

A: If you have to ask that question, it’s probably best to rent.

The decision to buy a house is typically motivated by common sense financial analysis, and if you haven’t yet reached that point, keep renting.

Q: So, are there any reasons to rent?

A: Yes, there are a number of good reasons to rent your home:

Cash flow — Renting may leave you with more leftover cash each month, allowing you to build your savings to a comfortable level before making a large cash commitment to buying real estate.

Flexibility — While renting, you retain the ability to make a major change in your living situation easily and without major cost. At the end of your lease, you can move to another community or even another city!

Building credit — If your credit has been damaged, making on time rental payments can help build and improve your credit score, allowing you to eventually qualify for a lower cost borrowing experience.

No repair costs — In most cases your landlord is responsible for repairs, freeing you from the financial drain of a new roof, a burned out water heater, or a faulty furnace or air conditioner. These expenses are real and they are major. Building them into your rent can save you cash.

Q: So you are saying that it’s usually best to rent your house or apartment?

A: Not necessarily. In fact, there are a number of compelling reasons to consider buying a house or condo right now. Here are some of the best:

Building equity — When you pay rent, you are paying your landlord’s mortgage. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment.

A good rule of thumb is that if you intend to stay in your property for at least four to five years, the costs of purchasing are more likely to be offset by accrued equity and increased value. If the equity grows to more than 20 percent of your loan balance, you may be able to borrow against it. This can provide capital for major expenses.

If interest rates drop, you can refinance your mortgage at lower rates, or, once you’ve paid the entire mortgage off, borrow against the equity in your home to fund major purchases such as a second home or your child’s education.

Tax deductions — You can deduct mortgage interest as well as your property taxes against your income. Uncle Sam doesn’t give renters this bonus.

In addition, if you meet certain requirements the IRS won’t apply a “capital gains” tax on profits from the sale of your home. You can keep the first $250,000 you make if you’re single, or twice that amount if you’re married.

In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.

Creative control — You like lots of pictures on the wall? Well, hammer away - you own the walls now. Go ahead and paint them orange! Wish you had another room? Add one.

Maintenance choices — If you live in a house, you get to decide how to approach maintenance, either taking it on yourself or picking your own contractor. If you live in a condominium or are covered by a homeowners’ association, you may pay a monthly fee to have maintenance work covered by the association’s contractors. Either way, you’ll have a say in who does what.

Pay yourself — Finally, you have to live somewhere. That being the case, you might as well pay yourself to live in your house as pay your landlord.

The bottom line is that there is no perfect choice. Only you can decide what’s right for you. My advice is to explore your options, understand the likely outcomes, then take action as you see fit.

Home ownership is not right for everyone. The recent recession proved that decisively.

But I am convinced from personal experience that, for most folks, the best investment they ever make is in their own home.

Atlanta native John Adams is an author, broadcaster and investor. He is also a property owner. He answers real estate questions on radio station WGKA (920am) every Sunday at 11:00 AM. For more real estate information or to make a comment, visit money99.com, where you will find an expanded edition of this column.

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