How to Decide Between Buying and Renting

Posted by Anonymous , 9/4/2007 Tags:DecideBetweenBuyingRenting
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How to Decide Between Buying and Renting

Introduction

You are confronting the buy versus rent dilemma. Here are some ideas to clarify your decision-making process and set you on a path towards smart financial planning.

Instructions

Difficulty: Easy

Steps

1

Step One

Brainstorm both your short term (6 months to 2 years) and medium term (2 to 6 years) life situation. Obviously, if you dona??t foresee yourself remaining in your city or town for more than 6 months, renting may be the best option.
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Step Two

Audit your finances. How much money do you realistically have to put into a property investment? If you have a potential down payment plus closing costs saved up for the occasion, buying may seem attractive. You can then keep a substantial portion of the money you pay every month as equity.
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Step Three

Check out your credit report. If your FICO score (the credit health score that the bureaus keep on you) is low, you may want to rent until you have the ability to qualify for better interest rates.
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Step Four

Survey both rental and mortgage prices in your target neighborhoods. You can use the help of a real estate agent, or you can find real estate information on the web.
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Step Five

Do a cost benefit breakdown of your ideal rent and buy scenarios. Use hard numbers where possible.
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Step Six

If you are evaluating two life pathways (climbing up a corporate ladder versus traveling around to establish a music career), come up with separate budgets for each life scenario. Thus, you will have four total budgets--two for renting and two for buying.
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Step Seven

Double-check your budget with an accountant or at least with a friend who understands accounting well.
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Step Eight

Make an informed decision based on these considerations and other factors (family needs, location, schools, crime, etc.) that may be important to you.

Tips & Warnings

  • Study property values in your target neighborhoods to determine whether a home mortgage investment may ultimately yield dividends in the mid- to long-term. Remember that your monthly rent or mortgage is a liability against your budget.
  • Be sure to have enough assets (income, dividends from investments) to offset your living expenses.
  • Homeowners may be entitled to tax breaks on the mortgage-based interest they pay.
  • Some homeowners may qualify for special grants to offset the costs of home ownership.
  • One advantage for renters is they dona??t have to pay for maintenance and upkeep.
  • Renters may rent month to month or may be bound into 1- or 2-year agreements. Make sure your contract with your landlord specifies your time frame and obligations.
  • You should never jump at your first home buying or rental opportunity without looking into specifics about the property. The chances are low of landing the ideal living/financial arrangement on your first property. Research and know the market in and out before choosing.

Overall Things You'll Need

  • Car and phone to coordinate travel and communication during search
  • Membership in local rentera??s network (optional)
  • Real estate agent (optional)
  • Proof of employment and proof of good credit
  • Security deposit or down payment
  • Budgets for all rent/buy scenarios
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