One question many young people ask themselves is, “Should I buy a home or rent an apartment?” The answer isn’t simple. Both options have advantages and disadvantages. Apartments can be a good short-term option if you don’t have the money for a down payment or closing costs, but you get no return on investment from the rent you pay. A home can be a great long-term investment, but it takes money upfront. And if home prices fall, you could end up owing more than the home is worth. Here are some factors to consider:
Do I have the money for a down payment and other upfront costs?
Buying a home costs money, and not just for your monthly mortgage payments. According to realtor.com, lenders like borrowers to make a down payment of at least 20 percent. Some will accept a 10 percent down payment, but you’ll usually pay a higher interest rate. You may also have to buy mortgage insurance. In addition, the more you borrow, the more you’ll pay in interest.
Other front-end costs include paying an inspector and applying for the mortgage. Some Home Owner’s Associations require move-in fees. At closing, you’ll have to pay administrative costs to the lender, the title agent, etc. You may also have to pre-fund an escrow account (a fund from which homeowner’s insurance and taxes are paid).
If I do have the money, is a home the best investment?
In simplest terms, this means deciding whether investing that money in the market would net a bigger return than the expected increase in property values. But it’s actually more complex. You have to consider your interest rate, the tax deduction you’d get for paying that interest, property taxes, etc. And then you need to weigh that against the fact that you’d get no return at all on your rent payments. It may be a good idea to ask a financial planner to help with this decision.
Where do I see myself in 5 or 10 years?
In a hot real estate market, it’s possible to make money on a house in just a few years. Today, however, many people are finding that they owe more than their house is worth, because property values have fallen. So if you see yourself moving in a few years, an apartment gives you more flexibility. You also need to consider things like school districts. Even if you don’t have kids now, you may someday. Where do you want them to go to school?
Do I have the money and skills for home maintenance?
Houses need painting; roofs need replacing; lawns need mowing. And things break. If you don’t have the skills to do these things yourself, you’ll have to pay someone else to do them. And don’t think you can just let them slide; many HOAs have strict rules about property maintenance. Annual maintenance expenses typically run about one percent of the home’s value. And that’s not counting major expenses like roof replacement. MSN Real Estate offers some interesting sample calculations.
There are some situations where the answer is clear. If you plan to stay in the same area for a long time, have money saved up, and want your children to attend a particular school, home ownership may be right for you. If you think you may move within a few years, want to live in an area that’s fun for young people but not the top choice for families, or if you have no savings beyond a few months’ living expenses, an apartment might be a better option. Professionals like Kevin Kerekes in NJ can help you work through the details.
There are pros and cons to both apartment living and home ownership. Many people do both, just at different stages in their lives. Consider all factors carefully to make the decision that’s right for you, right now.
Peter Miles is a real estate investor and consultant for individuals and small businesses. When he’s not writing about business, he’s not happy, but will settle for long walks with his wife and dog.