When considering housing, it will probably make one of many different decisions. The first is whether to rent a house or apartment or buy a home. The rent versus buy decision is based on many variables, two of the most important of which are lifestyle preferences and financial considerations.
Some rent versus buy decisions are based on lifestyle preferences. Older persons, for example, may prefer not to be the responsible for maintenance of property. Persons moving to a new community often prefer to rent for a time until they know the community better and can make a more informed decision about where to purchase or build a home. Persons desiring more room and the ability to make whatever changes to the property they wish may choose to purchase a house. But at the heart of many rents versus buy decisions is simple economics.
Home purchasers are required to make a down payment. Thereafter, they make monthly mortgage payments, usually for 15 or 30 years. Renters are not required to make a large down payment, but must make rental payments to the property owner, usually on a monthly basis, for as long as they live in the rental property. Property owners built equity through their mortgage payments. Equity is the difference between what the property is worth and the amount that is owed on the property. In addition, home buyers reap a number of tax benefits associated with the purchase of the property. Renting does not build equity in the property or provide tax advantages to the renter.
Many home buyers, at Tom and Frances Sullivan hope to be, start as renters while accumulating enough funds to make the down payment on a home. If you rent an apartment, then dollars cost of renting includes the actual rent payments that you make and the cost of renters insurance. If you purchase a home, you incur some direct expenses, you forego some income, and you receive some tax benefits. The direct costs of owning a home include mortgage payments, property taxes, homeowners insurance (which costs more than renters insurance because you are insuring a home), and maintenance expenses. The income that you forego is money that you could have earned from investing the down payment elsewhere. Since this investment income would have been taxed, the proper value to consider is the after-tax value of the investment income.