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To Buy or To Rent In Washington? Which will you choose?

To Buy or To Rent? Which will you choose? As a home buyer in Washington, and a real estate expert in Seattle, Spokane, Tacoma, and Everett, we often get asked by our friends and colleagues whether to rent or to buy. Our simple answer is “buy a house” and become a homeowner. However, let’s review the question in detail and go over the costs along with advantages and disadvantages of each option.

To Buy or To Rent? It’s a popular question for many today. Prior to the housing crash of 2008 most Americans wanted to own their home; however, since 2008 a lot has changed and many are choosing to rent even though they could afford to own a home. So, let’s examine this decision in detail and see if it makes financial sense. Since the middle of the 20th century, the U.S. homeownership rate has fluctuated between 62% and 70%. According to CNBC, it sat at 63.4% in the second quarter of 2015, the lowest level since the mid-1960s. This decline is largely due to economic and demographic factors, such as the downsizing efforts of aging Baby Boomers, elevated housing prices in some high-population markets, and high student debt loads that prevent many younger buyers from saving enough to make down payments.

Clearly, the upfront cost of buying a house is the most significant factor guiding the decision whether to buy or rent. An article from moneycrashers.com on buying or renting a place to live helps us examine the decision.

Upfront Costs

Costs of Buying & Owning Your HomeCosts of Renting Your Home
Earnest Moneyranges from 1% to 3% of the home’s purchase priceSecurity DepositMany states limit security deposits to 1.5 times monthly rent
Down Paymentranges from 3.5% (chiefly for FHA loans) to more than 20% of the purchase price.First Month’s RentMost landlords require the first month’s rent upfront
Home Appraisaltypically $300 to $500, are paid during or before the appraisal.Nonrefundable Depositspet deposits are commonplace – typically range from $100 to $500, depending on the type of animal and base rent.
Home InspectionThe cost is similar to the appraisal and is usually paid at the inspection.Moving Costsaround $100 or $200 to more than $1,000, depending on how much you have to move
Property Taxesusually in six-month increments of the property tax  
First Year’s Homeowners InsuranceHomeowners insurance costs vary based on the value, style, location, and contents of the home and coverage limits  
Other Closing CostsAppraisal, inspection, taxes, and insurance. closing costs include loan origination charges, credit report fee, flood certification fee, lender’s and owner’s title insurance, recording taxes, state and local transfer taxes, first month’s mortgage interest, and closing fee.  

Now the recurring cost

Costs of Buying & Owning Your HomeCosts of Renting Your Home
Loan Payments.Monthly principal and interest payments for the life of your mortgage loan, usually 15 or 30 years. Depending on your mortgage, interest rate, and down payment, monthly payments vary significantly but are typically higher than rent in Seattle and lower than rent in Everett, Tacoma, and Spokane.Monthly RentRent payments vary widely based on local market conditions, the number of occupants, and the size, condition, and location of the rental. In Seattle, they can easily surpass $1,500 for a 1bd and $2,000 for a 2bd apartment. In Everett and Tacoma a 1bd could be had for less than $1,000 and a 2bd could be had for less than $1,500. Prices in Spokane are generally on par with Tacoma and Everett.
Property TaxesRates vary widely by location and often change from year to yearPet RentInstead of a pet deposit, some landlords charge pet rent
Homeowners Insurancecan vary from year to year based on changes in your home’s appraised valueRenters InsuranceRenters aren’t required to carry renters insurance for their possessions, but it’s highly recommended to protect against loss due to theft, fire, and other perils
Private Mortgage InsuranceMonthly PMI payments typically range from $50 to $200, depending on your loan’s balance and PMI rateUtilities.water, gas, electric, garbage and recycling, cable and Internet, and perhaps more
Utilitieswater, gas, electric, garbage and recycling, cable and Internet, and perhaps moreLaundryMany rentals don’t have in-unit laundry machines.
Maintenanceexpect to pay 1% of your home’s value per year on maintenance and wear-related replacements and repairs.  

Special or One-Time Costs

Advantage Buying & Owning Your HomeDisadvantage Buying & Owning Your Home
Building Equity Over TimeActual ownership of the property and growth of its value in a growing housing marketPotential for Financial LossIf home values in your area decrease or remain flat during your tenure as a homeowner, dragging down the appraised value of your home, you risk a financial loss when you sell
Tax BenefitsSeveral tax benefits cater exclusively to homeowners,e.g. Homestead Exemption & Federal Tax Deductions.Responsibility for Maintenance and Repairs you can expect to pay about 1% of the value of your home annually toward these expenses
Potential for Rental IncomeHave the whole house or part of it for rent for a long period of time or for short time renters like Airbnb.Most Homes Aren’t Sold FurnishedYou need to spend time, money, and energy furnishing your newly purchased home.
More Creative FreedomSince the place is yours you could actually do whatever you like or whatever designs/modification for your unit.High Upfront CostsExpect to shell out no less than 5.5% of your home’s value and up to well over 20% of the purchase price.
A sense of Belonging and CommunityHomeowners tend to stay in their homes longer, developing attachments to the neighborhood, joining associations that make you feel part of the community.  

Advantages and Disadvantages of owning and renting a house

Advantages of RentingDisadvantages of Renting
No Responsibility for Maintenance or RepairsYou just have to call your landlord or superintendent for the repairs.No Equity BuildingUnless you’re party to a rent-to-own agreement, every dollar you pay in rent is gone forever.
Relocating Is EasierLess time-consuming, and potentially less costly.No Federal Tax BenefitsRenters aren’t eligible for any housing-related federal tax credits or deductions.
No Exposure to Real Estate MarketHome values fluctuates in response to changing economic conditions and can decline over time. Which s not your problem.Limited Control Over Ongoing Housing CostsYour landlord has the ability to raise your rent once your current lease expires unless you live in a municipality with rent control laws.
Credit Requirements Generally Less StrictAs long as you don’t have a checkered credit report that includes bankruptcies and judgments, you’re likely to find a landlord willing to rent to you.Limited Housing SecurityYour landlord can evict you without a cause no law entitles you to remain in your rental unit indefinitely, just a notice of 30-60 days is generally given.
Some Utilities May Be IncludedSome of the utilities are included in your rent like TV cables etc.  

Another great resource with a balanced review of the topic is  https://outwittrade.com/when-to-rent-vs-buy The author Katie Holmes is well versed in the question of personal finance and provides terrific insights in this article.

To conclude the analysis, if you have enough money for a downpayment and you like the area well enough to stay there for a few years then buying property is a much better decision. However, if you don’t have the money or don’t like the area then renting is a better decision. Of course, it is still up to you whether you choose to buy or to rent, but a piece of advice, make sure you chose a comfortable, safe, and convenient location that you call home.

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