How to answer an age-old real estate question

A: The truth is that there are benefits in renting and there are benefits in ownership. At the same time, whichever form of real estate you select, there are drawbacks and pitfalls we can find.

Q: So how do we decide?

A: The first step is to find out if ownership is even an option.

Because most of us need longterm financing for 80 percent or 90 percent of the purchase price, we need to find out if we can get a loan.

The easy way to do this is to call a reputable lender, such as your credit union or community bank, and ask to be “pre-qualified” over the phone. This step should cost you nothing, and will give you a good idea as to whether or not owning is an option at this time.

Q: So, let’s assume we are qualified and that we do have the needed funds for the down payment and other fees and costs. Do we rent or buy?

A: Assuming you have the choice, your next step is to estimate how long you plan to live in the same place. If the answer is three years or less, my advice is to rent.

One of the disadvantages of owning a house or condo is that there are high transaction costs whenever you decide to sell. It is not unusual for the seller to pay a marketing fee of 6 to 7 percent, and buyers often expect sellers to participate in settlement costs, which can easily add another 3 percent or more.

As a result, if your home has not gone up in value, you may lose money by selling in the first few years of ownership. With that caveat, here are my pros and cons:

PROS of OWNERSHIP

• Pride of Ownership - It’s yours and you can paint it any color you choose!

• Forced Savings Plan - Because you are paying off the loan, you tend to accumulate equity over time. This has been dubbed the “wealth effect.”

• Tax Benefits - Buy it, live there a couple years, then sell at a profit if you can. There are absolutely no taxes on the first quarter million bucks per owner-occupant. There is truly nothing like it.

CONS of OWNERSHIP

• You are stuck - for a few years anyway. Buying then selling quickly can get expensive in a hurry.

• Repairs & Maintenance - This is one of the so-called “joys” of home ownership! (full disclosure: I have a small tree growing in my gutter).

• Rising Taxes & Insurance - Seems like every year, these costs go up and you just have to pay.

• High Costs of Selling - If you decide to sell, costs are typically high, though some can be avoided.

PROS of RENTING A HOME

• Flexibility - move when you want, where you want.

• Repairs & maintenance - just call the landlord!

• Location & amenities - by renting, you may be able to live in a better area and have a pool and a clubhouse, etc.

• Finances - By renting, you may be able to save on your overall housing costs, allowing you to save money over time.

CONS of RENTING A HOME

• You are BUYING the property for the OWNER - at the end of the year, you have only rent receipts as a reward.

• Uncertainty - the owner can sell or decide to not renew your lease.

• Your rent is likely to rise annually, and you can’t control it.

• RULES - You can’t do what you want unless it says so in the lease.

THE BOTTOM LINE:

Renting your home as opposed to buying it is a tough call for some and an easy choice for others. It is certainly one of the largest financial decision most of us make. My advice is to begin by understanding the options you have, then make your choice based on your individual preferences.

I personally believe that, for most Americans, buying a home is the best decision they will ever make. At the same time, ownership carries with it a longer term commitment to one place and an increased level of responsibility for the property. The final decision is up to you.

Atlanta native John Adams is a real estate broker, an investor, and an author. He hosts a talk show on AM920 WGKA each Sunday at 11am where he explores real estate topics. You are invited to submit questions or comments to Money99.com, where you will find an expanded version of this column.