Rent vs. Buy: Why Scales Tip Toward Renting (but Not Always)

When Susie Figueroa, 42, and her husband bought their bi-level three-bedroom home in Portage, Ind. for $135,000 five years ago, they did so believing that it would serve as a mandatory savings vehicle. Recent events have tested that belief.

The number of households renting an apartment or house rose by 3.4 million between 2004 and 2009, according to "The State of the Nation's Housing 2010," a report from the Joint Center for Housing Studies at Harvard. The Midwest saw the largest rise, with renters increasing by 13.4 percent. And with the fast-declining housing prices nationwide, it is easy to see why so many people argue that there is just no guarantee of increased value when one rents, leaving it unknown as to whether real estate will ever be a safe investment again.

Susie Figueroa disagrees. "We believe that we are investing in our future, as well as our kids," says Figueroa, an administrative assistant in downtown Chicago. She and her husband, William, 45, an executive security officer for a bank, have two children, ages 20 and 23.

Three months ago when they refinanced from a 30-year mortgage with a 6 percent interest rate down to a 15-year mortgage at 4.5 percent, the Figueroas learned that their home's value had increased to $155,000. "The appraisal was done before replacing the central air and furnace," she says. Although they spent $7,200 on the upgrades, with Indiana rebates and federal tax deductions it only cost them about half that. They've also replaced the hot water heater, rugs, garbage disposal, sump pump and appliances, and they painted.

All the maintenance that comes with owning is what has some renters saying that they will opt out of buying a home, in the old rent vs. buy debate.
Although Figueroa expects that their property, which includes a pool, to continue to increase in value as the town itself grows -- a newly built IMAX theater, a Menards and various other shops were recently constructed about five minutes away -- she says the real value is in the money it is helping her to save.

"When it comes to buying a home, the key is to buy at a low price and pay as little for financing as possible, and pay it off as soon as you can," says Figueroa, who for 10 years prior had owned a home in Calumet City, Ill. "Sometimes you get a high return, sometimes just a moderate one. The only thing you get from renting is the return of your security deposit (and sometimes that doesn't happen)."

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For the Figueroas, the money they expect is not necessarily from a return on their investment, as she says that a rental might cost her $600 per month rather than the $1,058 per month mortgage that they pay, inclusive of taxes and insurance. The payoff is in knowing her own limitations to save. "If I had to pay rent would I put the rest in the bank to save?" she asked rhetorically. "I honestly think I would spend it instead."

If you plan on being in your home for a long time -- five years or more -- owning can be better than renting, especially if you're also a spendthrift rather than a saver, says Jim Gaines, a research economist at the Real Estate Center at Texas A&M University.

"Homeownership is forced savings," he says. "Yes, you have to make the monthly payments, but you would have had to pay that anyway. Even if you're renting, you have to pay some housing costs. If right now you can rent for $500 a month less than owning, do you save that or do you go out and spend it?"

There is no right or wrong answer, your own lifestyle and habits can help you determine what's best for you.

If you're trying to decide whether to buy or rent, there are just a few questions you need to ask yourself to know if you should be a renter or a buyer, says Gaines. Follow these tips to determine what's best for you:

How long will you stay put?

If you think your job may transfer you out of state within two years, or you expect to upgrade from a one-bedroom condo to more bedrooms in less than five years, you're better off renting. "Most of the time if you're looking at a home as a short-term investment you are making a mistake," says Gaines. "Mostly home prices don't go up fast enough to make [a big] profit." This is especially true when you factor in

What can you afford?

There are hidden costs of ownership, not just in dollars, but in time and commitment. If you own you have to maintain the property. If the sink stops up, you're responsible for getting it fixed. "With rentals you don't have to worry about any kind of major repair," says Gaines. "If the roof leaks you can call the landlord to fix it." (Though some renters will tell you that the their landlord isn't always on the case.)

Keep in mind, says Gaines, that even if you're renting, the cost of maintenance is built in to what you pay the landlord. "You don't directly pay the property taxes, but you do pay toward it because it is part of the deal, same with paying toward the property taxes, but without the [benefit of] interest deduction."

What are you looking for qualitatively?

Quite often you don't get the same quality of housing when you rent as you do when you buy. "One of the things that gets lost in the discussion is the quality of the space, not just physical quality like construction and amenities, but also the location," says Gaines. For example, consider if you want to be in a particular school district, or if you want to live walking distance to a rail line. Some people prefer to shed shared walls in favor of the detachment of a single family home. And you also need to consider the size of space you want and the amenities. "Generally in the better locations you don't find the rental properties." It's not always fair to compare $1,500 month mortgage with $1,000 renting unless it is the exact same quality, he says.

If you answer these questions, the type of unit you should live in becomes almost obvious. All that's left is, says Gaines, "what's available?"

Still trying to decide which is right for you? Here are some AOL Real Estateguides to help you no matter whether you choose to buy or rent:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
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