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Is it cheaper to buy or to rent?  This is an age-old question that many people seem to ponder.  The answer, of course, is not so simple.  It really depends on many factors, the most relevant being the area/city where you live and the amount of time you plan to live there.  I used to be a CPA for many years before going into real estate and I have always had the opinion that unless you are planning to want/need to move in 3 years or less, it’s almost always better and cheaper to buy than rent.  So, let’s assume for the purpose of this discussion that moving in the short term is not a factor.  Because of the recent crash in the real estate market across the entire country, it’s likely to be less expensive to buy than to rent no matter what city you live in due to low prices (even though they’ve been increasing, they are still low) and due to the extremely low current interest rates.  I live and work in the Phoenix/Scottsdale area and according to a recent study report by Trulia (see http://info.trulia.com/rentvsbuy-winter2013 for more information), it is 46% cheaper to buy than to rent at the going interest rate and even if interest rates were to increase by 2% (which is a lot), it would still be 34% cheaper to buy than to rent!  Wow!  So, what are some of the benefits of buying over renting in the Phoenix/Scottsdale area now, in 2013?

  1. It is incredibly cheap to get into a nice home right now and that opportunity won’t be around forever.  Prices dropped as much as 60% in some areas of Phoenix and the absolute rock bottom prices were in September 2011.  Prices have been increasing since that time, but relatively speaking, are still very low.  With the shortage of inventory that we have had here for the past year and half, prices will likely continue to rise for some time.  Zillow is predicting that home prices in Phoenix will be 9.8% higher in February 2014 than they were in February 2013 (see http://www.zillowblog.com/research/2013/04/10/zillow-home-value-forecast-for-february-2014/ for more information).  Additionally, mortgage interest rates are at historic lows right now.  The federal government has been buying bonds to keep the interest rates low until the economy improves.  Unemployment rates, one of the lagging indicators of the strength of an economy, are improving.  It is only a matter of time before interest rates start to rise again, and when they do, they won’t get this low again for a very long time, if ever.   
  2. You build equity when you buy; you don’t get any benefit from rent expense.  When you buy, you gain equity, which is a great investment.  This happens in two or three different ways.  First, a portion of every monthly payment you make on your mortgage goes to pay yourself back and increase your equity in the property.  Second, because prices are low now and are on the rise, each year, you gain a little bit of equity through increasing prices around you.  Third, if you make the right kind of improvements to your home, you can increase the value of your home.  If you are renting, you either have to live with the finishes in your current place or move up to a place with nicer finishes in the home which will cost you more rent that won’t benefit you in the future in any way.
  3. You get a big tax benefit when you buy.   When you buy, you get to write off your interest expense, any mortgage insurance you pay, and your real estate taxes on your tax return.  In the year that you buy, you can often write off any points you paid to get your mortgage as well.  These expenses are claimed by itemizing your deductions instead of just taking that standard deduction each year.  Once it is beneficial for you to itemize your deductions, you get to take advantage of writing off other expenses you’ve likely been incurring as well, such as donations to charities, state and local income taxes paid to your employer, tax preparation fees, out of pocket medical costs (above and beyond your premium paid to your employer), etc.  Why wouldn’t you want the check you write each month to live in your home REDUCE the amount of federal income taxes that you pay??
  4. You get more control over your home decor.  This one isn’t always directly a cost savings, but often is.  The benefit is that when you buy, you get to paint your home any color you want, you get to change your countertops or flooring anytime you want.  You get to choose to add or remove landscaping, etc.  If you do the right kinds of improvements to your home, your home will increase in value.  But, when you rent, often times you have to move to a more expensive place to get better countertops, flooring, landscaping, etc.  That cost doesn’t benefit you in the future whereas the costs of making the improvements on your own homes does (again, assuming you do reasonable improvements).

Are there any downsides to buying versus renting?  Sure.  Of course there are.  For example, any repairs that are needed come out of your pocket and must be dealt with by you versus your landlord.  Although it is definitely more inconvenient to deal with fixes yourself versus just making one call to a landlord, it is pretty easy to do things to help mitigate the possible expense of such repair items such as purchasing a home warranty, etc.  On the flip side, you also get control over the timing and quality of the fix when you own.  Another downside could occur if you have an unexpected event that causes you to have to move much sooner than expected.  In a period with a normal rate of appreciation in prices, you would need to be in your home for at least 3 years (or more) to be able to recover the closing costs and selling costs of your home.  In a period of depreciating prices, money could be lost depending on the timing of the move.  Although, in this case, you do have the choice of not selling and just renting your home to someone else and use their rent money to pay your mortgage while you continue to get the income tax benefits and the paydown of your principal on your mortgage every month!

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