Should You Rent or Buy a Home

Modern history shows us that humans have mostly moved away from the nomadic lifestyle. The vast majority of the nations now populating Europe are exactly the opposite of nomads – they are settlers. In fact, up to very recent history, Europeans were happy to settle just about anywhere and anything. To the dismay of the rest of the world. But that’s not the point we’re getting at here.

The point is – over these past few millennia, we as a species have grown accustomed to settling in specific locations. We’ve made our lives close to where our ancestors have spent theirs. And, most likely, we intend our children to make their lives close to where we have, ourselves. We’ve formed settlements and communities to gain a sense of security and belonging.

This type of lifestyle has a certain requirement about it – and it’s being passed down from generation to generation. To settle somewhere, to feel this sense of security and belonging, we as a species need to own a home. It’s a learned behaviour passed on to us from our parents, from the society surrounding us. And owning your own home, your safe harbour, certainly has its perks.

So, what are the perks of being a homeowner?

Whether it’s a flat in the city or a house in the suburbs. A seaside villa or a farm in the countryside. Having a property to your name can make sense from a financial aspect. However, it’s also worth noting the psychological perspective of owning a home. Let’s have a look at some of the pros in having a property:

  • it can be considered an investment, as you put your money toward something that will ultimately become yours to do with as you please;
  • in some countries across Europe, homeowners can receive tax relief/deductions which can attribute to one’s wealth;
  • being a homeowner can grant one a sense of belonging and permanence

As you can see, owning a home can contribute to your well-being in a multitude of ways. Either buying a property upfront or getting a mortgage can help you build equity, as you put your money towards a property you will own sooner or later (as opposed to paying rent for the use of someone else’s property). And, the psychological gain here would be the sense of stability, belonging. Which is not to be understated.

Where there are pros, there must be cons?

Yes. Yep. Of course, there are cons. Even though buying a flat or a house can be and mostly is a positive experience in the long run, there are occasions when owning a property can be a real pain. Here’s why:

  • mortgage expenses/interest rates and property taxes;
  • sudden and unexpected decrease to the property value or expenses;
  • owning a property can reduce your flexibility as an individual

These are just some reasons why buying property can turn out to be less desirable than some people might think. As an aspiring homeowner, you can expect that getting yourself a mortgage might not be as straightforward and cheap as initially thought. For one, in order to get a mortgage the financing institution will expect you to make a down payment and pay mortgage fees upfront. And once you’re through with that, repaying the mortgage is usually structured in a way where you will pay mostly interest during the 1st third of the mortgage term.

Depending on where you live, you’ll have to pay property taxes, as well. Add to that homeowners insurance and unexpected expenses that said insurance doesn’t cover. If you view owning a property as an investment opportunity as well as having a home – it’s important to remember that in certain areas where property value is already very high, the value is prone to fluctuate. For instance, the neighbourhood you live in changes to the worse over time. Therefore, your property loses value instead of increasing in value.

And finally, having a property to your name means that you potentially have a large portion of your money tied up in an illiquid asset. Personal finances permitting, that might not be that big of an issue for some. However, if you wake up one morning and decide you want to move to South Tenerife for a couple of years, you would be highly dependent on the current housing market if you wish to sell your property at a profit.

Can renting be a viable option then?

Firstly, it’s important to understand that owning a property might not be an option for everyone. Considering housing prices all over Europe, really – the World, rapidly climbing out of range for many people – renting might actually be the only solution available to a large percentage of the population.

Secondly, even though we established that humanity has been moving away from the nomadic lifestyle for thousands of years now – it’s safe to say that nowadays it’s easier to be a nomad than ever. Thanks to the creation of the World Wide Web and overall technological development, many modern professionals are able to work remotely. Meaning, people are not tied down to a certain location due to their jobs.

Thirdly, the same technological development has brought on means to travel further and cheaper than ever before. The whole world is at your feet if you’re willing. And, as time passes, for many this becomes an itch you cannot simply scratch. Therefore, owning a property as an idea is starting to wane for younger generations around the globe.

Of course, similarly to buying property, renting can also have both pros and cons. Anyone who’s trying to figure out the best option needs to look at those to have a better understanding whether to choose buying or renting. So, here are some of the pros:

  • as a tenant, you don’t need to worry about property taxes and maintenance costs;
  • paying interest on your mortgage or homeowners insurance is obviously out of the question;
  • as an individual, you gain flexibility and freedom by renting as opposed to buying

Indeed, as a tenant, much of the worries a homeowner has to face daily just fly out the window for you. Any costs specifically arising from owning a property are no longer an issue. One could argue that these expenses are actually covered by the rent you pay – which is true. However, unless you intend to spend the rest of your life living under your parent’s roof, you have to face the one unavoidable truth – housing is expensive. It means that you will pay a lot of money, regardless of whether you own or rent.

What shouldn’t be overlooked, however, is the ability to move at a moment’s notice, if you have to or want to. As a tenant, you have some obligations, naturally. But, at most – you would lose your deposit, whereas with owning a property it can take weeks, months or sometime – even years to liquidate your investment or figure out another solution that you find fitting.

As you can see, ‘time of stay’ is key

Whether you intend to buy or rent, you should consider your intended time of stay at the property. Perhaps, it’s not as easy for someone who leads a most dynamic lifestyle and moves at a moment’s notice. But, unless you’re one of these individuals, you should carefully weigh your plans and options.

For instance, if you already know that you intend to stay at the property for 5 years or more, buying might actually be for you. The longer you stay, the more financially sound the decision to buy turns out to be. Remember, when purchasing a property, even if you pay cash up-front, you’ll face additional costs and fees associated with registering the purchase, brokerage etc. These costs will dissipate gradually – the longer you stay put.

If you’re unsure that you’ll stay at the property more than 5 years, or if you’re certain that you won’t – it would probably make more sense financially to rent. First  – you will save money on all the additional costs that purchasing a home entails. Secondly, consider that many European countries have capital gains tax. It means that even if you manage to sell your property at a profit, you’ll most likely have to pay tax from the gains. Especially if you haven’t lived at the property for more than a couple of years.

There are clear-cut differences between buying and renting

But ultimately it’s impossible to tell which one is better. At least without seriously considering all the circumstances. It’s of the utmost importance to think everything through, when deciding upon your housing situation. It will depend heavily upon your lifestyle and needs, as it should. The keyword here being ‘your’. You shouldn’t let anyone discourage you or influence you to do something that doesn’t fit your needs. Especially with something as essential as the roof over your head.

And, yes – purchasing a property can be an investment. Whether you intend to live in it yourself, give it up for rent or simply sell for a profit somewhere down the road. But you would do well to research everything before making any decisions. As you have to with any type of investment.

This is an informative blog entry and should not be taken as financial advice.