Rent vs. Buy — that is the question. Let's give you some insight!
In Boston, renting can offer a lot of flexibility and peace of mind compared to owning a home.
At Jumpshell, I get a lot of questions from renters wondering if they should think about buying a house. Naturally, people feel worried that they're "wasting their money on rent" when they could be paying a mortgage on a place they own — a totally understandable concern considering all the conversations about rent prices in Boston.
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This article will provide some context about what personal, financial and emotional considerations should go into buying a home in Boston. The goal is to help renters in Boston understand that renting isn’t “worse” than owning — it’s just different. Luckily, for a lot of people in Boston, renting is the ideal housing situation and is actually a far more intelligent decision than buying. Here are some distinct scenarios where you can feel confident that renting is the right choice to help relieve the psychological burden that comes with thinking that you “should” buy.
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1. You don't have a solid reason to buy a house.
There are three primary motivations that compel people to consider buying over renting:
- You want to build home equity* — you don't want to "throw your money away" by paying rent every month. You want to start building equity in a property by paying off a mortgage.
- You're ready for "the next step" — you've been renting for a while and you want to move yourself and maybe your family into a better, bigger space.
- You want a revenue generating asset — you want to buy a property and turn it into rental units to start earning income from tenants. For anyone thinking about buying a house for the first time, this isn't typically a consideration.
If none of these apply to you now, then you're already off the hook.
Maybe you'll change your mind in a year, but that's the beauty of having a 12-month lease. Leases are temporary and allow you to be completely flexible. Since there aren't many other good reasons to consider buying a house, you can be confident that renting is the way to go. *Check the bottom of the page for why you might not necessarily need to worry about building home equity right now.
2. You’re not sure where you’ll be in 3-10 years.
Alright, let's say that you're still considering buying a place. Unless you're absolutely certainyou'll be in Boston for the next 3-10 years at least, you should feel great about renting.
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Here are three separate, reputable sources that warn you against buying if you're not certain of where you'll be in the next few years:
The New York Times — 10 Years
With regard to the time investment needed to justify buying a house, this quote from a New York Times article titled "5 Questions You Need to Ask Yourself Before Buying a House" might give you some pause: "Given the huge costs, both financial and psychic, of selling a house, it is generally a far better deal to buy if you will live in a place for a decade than if you will be moving in three years."
Doorsteps — 5 Years
Doorsteps, an online homebuying guide (i.e. they definitely want you to buy a house), offers some counsel on buying a house with an uncertain timeline, as well: "It can be risky to buy a house if you know you’re likely to move within five years. Renting may be a better choice for you financially. That said, there are exceptions to that rule, especially in certain market conditions. Make sure you speak carefully with your real estate agent and your lender to see whether buying truly makes sense for you."
Zillow — 3.3 Years
Finally, even Zillow, a company that absolutely wants you to buy a home (because that's how they make lots of money) can't justify you buying a place before their "Breakeven Horizon" — a proprietary estimation of the number of years you must live in a home before owning the same home becomes more financially advantageous than renting the home. In Boston, the minimum amount of time you must stay for it to be smart financially is over 3 years! Breakdown by neighborhood below:
Zillow Breakeven Horizons in Boston, as of May 2015:
Source: Zillow Market Research
Bottom line, unless your explicit goal is to stay in the Boston Area for a long time, you should capitalize on the flexibility renting provides.
3. You're not financially ready to buy.
Buying a home is by no means a "mortgage takes the place of rent" equation. I'm not the best equipped to tell you the details about the financial dimensions, so most of the counsel in this section will be from more qualified sources, including John A. Keith, a Boston-based real estate broker and real estate expert.
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You probably already know, but there are some pretty hefty fixed costs associated with buying a home.
- The down payment — "To buy the median-priced condo in Boston Proper, you’ll need a $100,000 down payment, and even if you look to buy in the suburbs, you’ll need to have savings of up to $50,000. That puts buying out of reach for many." (Source: Boston Magazine)
- The mortgage — "The fixed rate right now is about 4.34 percent, but your rate will probably be a bit higher, so you’ll end up paying a bit more per month. And, things such as taxes and condo fees will vary based on which property you actually end up buying." (Source: Boston Magazine)
- Maintenance and capital improvements — If you want your property value to go up, it'll take more than just the market becoming more attractive. "Thousands of dollars to replace the air conditioning unit? The new garbage disposal? Replacing the flooring in the kitchen? The new washer/dryer? Landscaping additions? You can’t write them off and while you may recover some dollars at sale, rarely do you recover the entire amount." (Source: Forbes)
I probably didn't even cover other "hidden" expenses associated with homeownership, but I'll leave it at these four. Compare that to renting, where ‘‘If your air conditioning breaks down, your landlord has to pay $6,000 to replace it, not you.’’ (Source: The Boston Globe) When you rent, all you need to worry about is rent + utilities. Easy.
The Takeaway? Renting gives you the liberty of being uncertain about the future.
In sum, for a lot of people, there are a lot of reasons why renting in Boston is a great decision. In fact, there are only a few very specific circumstances in which buying makes more sense than renting (most of which require having a good amount of money and certainty about the future). So if you're young and renting, think of rent as paying for peace of mind — a way to bypass the colossal obligation of owning your own place. I'll leave you with an excerpt from a great article on renting vs. buying that I found while doing some research: "Renting isn't second place. Renting isn't a consolation prize. Renting isn't unAmerican. Renting is wise and controlled. Renting is disciplined and measured. Renting is throwing your money away...into an awesome bucket."
If you're young and renting, you should feel pretty awesome about it.
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A note on home equity: I wanted to further elaborate on home equity to clarify why someone wouldn't necessarily be interested in it (compared to paying rent). It sounds great on paper, right? But there are very specific uses for home equity, usually taking the form of a loan to pay for different expenses. These expenses typically fall into one of three major categories, which Realtor.com explains:
- Consolidating many debts into one — debt consolidation is by far the most common way home owners use home-equity loans.
- Investing the home-equity loan in home improvement — home improvement is almost as common as debt consolidation as a use for home-equity loans.
- Invest home-equity loans in college Using home-equity loans for education is another popular choice, given the skyrocketing costs of post-secondary education.
So if you don't have a lot of debt that you're worried about consolidating or aren't even close to thinking about kids, then there's no need to worry about needing to buy now so you can take out a home equity loan.