When it comes to the decision of whether to buy a home vs. rent, there are often a lot of questions that may come to mind, especially in a competitive housing market like Oakland and the East Bay.
You may be wondering…
- Is now the right time to buy?
- How much house can I afford?
- What if I suddenly get a new job and need to move?
- What if I lose my job and have a sudden decrease in income?
These are all perfectly normal concerns and ones that frequently come up when considering whether to buy a home or continue renting. What often happens when these concerns arise is that people continue to rent, since it’s what they know.
However, unless renting is truly the best option for you given your future plans, buying a home now could drastically impact your financial future and help you build wealth in the coming years.
In this article, we’ll share with you a checklist of things you need to consider when making the decision of whether to rent vs. buy, the pros and cons of each option, an in-depth scenario showing you the long-term impact of renting vs. buying, and whether now is the right time to buy a home.
Things To Consider When Renting Vs. Buying A Home
Given the nuances of each home and each market, as well as your own financial situation and plans for the future, there’s no one-size-fits-all solution to the question of whether to rent vs. buy.
The best place to start is not with looking at available real estate listings and touring neighborhoods – but rather, to start with your own situation and life goals. Once you reflect on your ideal living situation and location, you can work backward from there to determine the best option for you.
Here’s our checklist of things to consider when deciding whether to buy a home or rent:
- Your goals and needs
- Your finances
- Your current living situation
- How long you plan on staying in your current home
- How much control and freedom you want
- Taxes
- Maintenance, utilities, and other home costs
- Equity, appreciating, and long-term wealth
Your Goals And Needs For Renting Vs. Buying A Home
One of the first things you should think about is your personal real estate goals when it comes to your home. Do you want to put down roots and grow your family? Do you want to try different locations and living styles before settling? Do you want the freedom to be able to move around, or do you want the stability of knowing you’re in control?
Start by reflecting on your life, values, and what’s most important to you. This will change depending on your phase of life, so start by thinking about just the next few years. What’s most important to you when it comes to your home during the next, say, five years?
Your Finances
When it comes to your finances, are you in a position to put in a potentially sizeable amount for a down payment? Or would it be more comfortable to continue to rent?
If buying real estate right now leaves your finances stretched thin (e.g., you won’t be able to save as much for retirement or you would be depleting your emergency funds), it might lead to more stress than it’s worth.
Before buying a home, you’ll want to make sure that you have stable and sufficient ongoing income, that you can comfortably afford a down payment of at least 20% (or you’re prepared to pay for mortgage insurance if opting for a lower down payment option), that you have a solid credit score, and that you have a handle on any other debts you may have.
Your Current Living Situation
Don’t forget to factor in your current living situation. If you live in a rent-controlled apartment where the monthly rent is much lower than comparable apartments in the area, and if you enjoy living there, you may want to continue renting for the time being and instead invest your extra capital to build passive income and long-term wealth.
For example, you might continue to rent while investing in rental properties either here in the Bay Area or in other markets, invest passively in real estate syndications (group investments), or otherwise leverage investments to grow your wealth.
If, however, you’ve outgrown your current living situation, crave more outdoor space, or want a space you can truly make your own, it might make sense to buy your own home.
How Long You Plan On Staying In Your Current Home
When it comes to whether owning a home makes sense financially, a major factor to consider is the length of time you plan on staying in your current home.
In most cases, if you plan on staying in the home longer, buying makes the most sense financially. This is because the first few years after buying a home, your monthly mortgage payments skew more heavily toward interest payments.
As time goes on, however, your monthly payments start to even out (half-and-half interest versus principal), and eventually, you’ll be paying more toward principal than interest.
The reason this is important is that if you plan to stay in your home longer, owning a home will allow you to put those monthly payments toward equity in the home. If you continue to rent, you won’t be able to recoup any portion of those monthly payments when you move.
However, when you buy a home and pay down your mortgage over time, you are able to recoup many of those monthly payments via equity when you sell the home.
To dig further into whether it makes sense to rent vs. buy a home based on your future plans and goals, use a rent vs buy calculator like this one to play around with different scenarios.
How Much Control And Freedom You Want
When buying a home, you gain a lot more control over your living situation. Want to paint an accent wall? Go ahead. Want to do some landscaping? Want to get a pet? Want to renovate the kitchen? No problem.
Unless you live in a condo – and thus need to abide by HOA (homeowners association) guidelines – you have full control over your home and thus the freedom to do as you please.
This is in stark contrast to renting an apartment, where you need to ask permission from your landlord for any decisions related to the home.
On the flip side, while renting a home may mean more limited customizability options, you do have more freedom to pick up and leave once your lease expires, without having to think about selling the property or figuring out a plan for the ongoing payments.
Taxes
When it comes to the tax size of whether to rent vs. buy, there are a few things you need to consider. As a homeowner, you would need to factor in property taxes, but a portion of your home payments will likely be tax-deductible (for example, you can write off the mortgage interest you pay).
As a renter, your monthly rent payments are not tax-deductible. You don’t pay property taxes directly, but you indirectly contribute to property taxes via your rent payments.
Maintenance Costs, Utilities, And Other Home Costs
When a pipe breaks in an apartment you’re renting, your landlord is responsible for the cost of fixing that pipe. When you own the home, you would be responsible for all maintenance costs, including the cost of fixing that pipe and anything else in the home that needs repair, updates, or improvement.
When you buy a home, you should also consider the ongoing costs, like landscaping, preventative maintenance, and more. You’ll also need to pay for all your own utilities – including water, trash, electricity, gas, and Internet – some of which may be rolled into your monthly payments as a renter.
Equity, Appreciation, And Long-Term Wealth
One of the core differences between renting and owning is that when you buy a home, you get the opportunity to build equity over time and take advantage of the appreciation in home value, which is particularly impactful in a fast-growing market like Oakland and the East Bay.
As a renter, the value of the home you’re living in has no impact on your overall financial picture. You continue paying your monthly rent, and that’s that.
As a homeowner, you have the opportunity to build equity in your home as you continue to make monthly mortgage payments. As you pay down your loan principal, and as the value of the home appreciates, your equity increases.
When you sell or refinance the home, you can unlock that equity, which contributes to your overall wealth and net worth. You can even apply for a home equity line of credit, which could allow you to borrow against the equity you build in your home.
Pros And Cons Of Renting Vs. Buying A Home
Now that you know some of the main factors to consider when it comes to deciding whether to rent vs. buy a home, let’s dive into the pros and cons of each.
When it comes to buying a home versus renting, there’s no “right” answer. The best choice for you varies based on your unique situation and future goals.
Regardless of which path you choose, it’s important to go into the decision having weighed all the different factors and with eyes wide open regarding the pros and cons of each.
Example Scenario – Renting Vs. Buying A Home
In order to more clearly evaluate your options, let’s take a look at an in-depth example scenario, based on real numbers and situations, to determine the impact of renting and buying on your finances and overall wealth picture both in the short-term and over the long-term.
Meet Renters Zack and Amy
Let’s meet our hypothetical couple – we’ll call them Zack and Amy. Let’s say that Zack and Amy are currently renting an apartment but have outgrown their current living situation.
They are currently renting a 2-bedroom apartment in Adams Point near Lake Merritt for $2,950 per month. However, since they are expecting their second child, they want to put down roots and have more space for their growing family.
Zack And Amy Buy A Home
Let’s say that Zack and Amy decide to move on from renting and buy their first home. They have their eye on a 3-bedroom home in North Oakland. The home is listed for $849,000, and Zack and Amy are able to buy it for $1,000,000 with a down payment of $200,000 and a loan of $800,000.
Assuming an interest rate of 4%, along with their down payment of $200,000 (20% of the home’s purchase price of $1M), their monthly mortgage payment comes out to approximately $4,550 (including principal, mortgage interest, taxes, and insurance).
This means that their monthly payment is increasing by $1,600 (from $2,950 in rent to $4,550 for the home they purchased). However, Zack and Amy are gainfully employed and are comfortable with the increase in monthly payments.
Fast Forward 7 Years – Zack And Amy Sell Their Home
Let’s say that Zack and Amy end up living in the home for 7 years before they decide to sell it and move to a bigger home with more space.
Let’s say that the home value appreciates by an average of 5% per year during those 7 years (the average across the Bay Area is generally around 5-6%, with variations based on submarkets).
Related: How Much Is My Home Worth? How To Accurately Estimate The Value Of Your Home In Today’s Market
That means that when they sell their home, the home’s value is over $1.4M. They will have made a mortgage payment at $4,550 every month for 7 years – or $382,000 altogether over that time.
How Much Money Will Zack And Amy Have Gained Or Lost Over 7 Years?
Over the 7 years, they will also have paid down their loan principal by a significant amount through each monthly payment. Now, rather than a loan amount of $800,000 (where they started), the principal amount is $688,000.
This means that they will have built roughly $112,000 in equity through diligently paying each monthly payment. When they sell, they can unlock this equity – which comes out to about 30% of the total monthly payments they’ve made over 7 years – and use it in purchasing their next home.
Equity And Appreciation
When all is said and done, let’s say Zack and Amy are able to sell their home for $1.4M. They have built a total of $712,000 through equity and appreciation:
Total equity/appreciation = $200k original down payment + $112k equity through principal paydown + $400k in appreciation = $712k
Total Amount Zack And Amy Walk Away With
When factoring in closing costs and other fees (which typically come out to around 6-7%), let’s say the math shakes to be:
Total cash in pocket = $712k in total equity/appreciation – $98k (closing costs / fees, which are approx. 7% of the $1.4M purchase price) = $614k
And, because they will have lived in the home long-term, they will likely not be subject to capital gains taxes on the $400k of appreciation in home value.
In other words, over the course of 7 years, Zack and Amy have grown their original $200,000 down payment to over $600,000 – a growth rate of about $60k per year. That’s like adding a third income earner to their household!
And, keep in mind that, while this scenario does factor in closing costs, it does not factor in the potential tax benefits, which could further contribute to savings and write-offs over the 7 years.
Related: Case Study: First-Time Home Buyers In Montclair
The Cost Of Renting
Now let’s go back to the rental situation. Let’s say that at the beginning of the scenario, Zack and Amy decided to rent vs. buy a home because they figured that owning a home was too difficult. Let’s say they were able to find a 3-bedroom apartment for $3,500 per month.
Assuming an annual rent increase of 3% over the course of 7 years, they will have paid approximately $320,616 in rent payments.
If, at the end of the 7 years, they decide to move out of their apartment, they aren’t able to recoup any of that $320k that they will have paid via rent payments.
They have no equity in the home, and thus even though the property value has increased over the 7 years, that does not contribute to their overall net worth or finances.
To Rent Or Buy – That Is The Question
As you can see, in this hypothetical scenario, Zack and Amy would do significantly better to buy a home rather than rent it, especially if they plan on staying in the home long-term.
In the rental scenario, they don’t need to pay the initial down payment, and their monthly payments are lower, but they aren’t building any equity and thus aren’t generating wealth for the future.
In the buying scenario, even though they need to put in a down payment of $200k and must stomach substantially higher monthly payments, they end up building substantially more wealth over the course of 7 years.
And this scenario just covered the first 7 years of homeownership. Imagine that Zack and Amy continue to buy additional homes after that first one – both primary residences and investment properties. This could snowball their equity over time and lead to life-changing wealth for their family over time.
That being said, if Zack and Amy weren’t quite ready to settle down and ended up moving several times in those 7 years, they might have been better off renting. Again – it comes back to your unique life situation and personal goals.
Is Now The Right Time To Buy A Home?
As of this writing, home prices throughout Oakland and the East Bay continue to surge. Demand is high, and the inventory of available homes on the market is low. Both renting and buying can be difficult given the high demand, so it’s important to understand your goals.
That being said, interest rates on home loans are currently very low, meaning that your monthly payments could be lower than they otherwise might be if interest rates were higher. Further, with the government stimulus over the last year or so, we could see substantial inflation in the coming years.
Taken together, all those factors point to now being a great time to buy. Even though home prices are high, they stand to continue to increase in the future, and thus now may be the best time to purchase a home and take advantage of that continued appreciation while locking in a low interest rate.
Related: How To Ensure Maximum Resale Value When Purchasing A Home
Are You Looking To Buy A Home?
If you’re in the process of determining whether you should rent or buy a home, feel free to reach out to our team of real estate experts anytime.
If you have questions about how much house you can afford, details of the process for buying a home, whether to buy a home or a condo, which neighborhoods are best for you, or anything else related to navigating the competitive East Bay housing market – we’re here to help.
We’re Oakland and East Bay homeowners ourselves, as well as real estate nerds, and we’ve helped numerous Bay Area families navigate the decision to buy versus rent and then successfully buy their first home.
If you’d like help navigating the decision and learning more about the options available to you, let us help. We will never pressure you to buy a home if it’s not the right fit for you and your goals.
Feel free to call or text us anytime at (510) 995-0035 or click here to get in touch.
