When it's best to rent:
- You may not reap the full benefits of tax write-offs for taxes and mortgage interest. That’s a signal that renting is wise. Median income homeowners realize no federal tax benefit in 75 percent of major cities.
- You have to look at the local price cycle. Many homebuyers purchase at the top of the market and won’t reap appreciation from the past. More than half of current homeowners, or more than 40 million households, purchased their homes during time periods when average homebuyers would have been better off renting and investing.
- Don’t overstate the benefits of buying. Many popular, free, online “buy-or-rent” calculators inflate the benefits of home buying. The study shows that calculators provide inaccurate guidance to more than 90 percent of renters considering whether to buy a home by overestimating tax benefits and underestimating the returns an individual can earn by investing.
- Do the math. Prospective home buyers should calculate their “rent-to-price” ratio, or the ratio of the annual rental costs of a home compared with its purchase price, to determine whether to by a home or rent and invest.
- What’s Your Bottom Line? If the rent-to-price ratio is 5% or less, people may be better off renting and investing any savings. If the rent-to-price ratio is greater than that, they may be better off buying a house.
If you have a yen to own a home, just keep in mind that ownership also entails property tax and maintenance. In growing areas, taxes are likely to rise to build schools, fire stations, libraries, etc.
Single family homes also need new roofs, furnaces and interior repairs. If you’re unable to set aside 2% annually of the value of your home’s mortgage, you won’t be able to keep up with maintenance.
Excerpts – Forbes