So you’re thinking of buying a home, perhaps the very first one? But you wonder whether you might be better off continuing to rent; and you have no idea how to figure out which choice makes more sense for you? Ultimately, the answer is dependent on a number of factors discussed below.
Whether to rent or to buy, the home location is highly influential. It not only affects your disposable income but also your lifestyle and the size of the savings you accumulate over the years. Most times, people buy homes when financially they would be better off renting, because to them, owning a home is a form of an investment and minimizes tax deductions. Similarly, people rent all the time for the flexibility and minimal responsibility it offers, even though they would amass a larger net worth over time if they bought a house.
Of the two options, the preference often veers toward ownership. Why? It's a big business opportunity for everyone; from mortgage lenders to real estate agents to home improvement stores, and so we are bombarded with the message that being a homeowner is the key to happiness and part of most, if not all, of our dreams. Ideally, owning isn’t universally better than renting, nor is renting always simpler than owning. It is a matter that requires decision making, analyzing both the pros and cons of each and figuring out which works best for you.
Here’s what people should take into account when deciding whether to take the leap into homeownership or stick to renting:
Monthly Budget
The first step when deciding your housing future is to figure out just how much you can comfortably spend. First, calculate how much money you bring in every month from all your different hustles. Next, deduct what you spend on essentials like food, transportation and some emergency cash. The remainder is what you can comfortably use for your housing. Bill Engel, a certified financial planner, states that a good rule of thumb is to keep the total housing costs, whether renting or owning, at around 28-30% of your gross monthly income. He adds, “You don’t want to bite off more than you can chew. Plan on having a cash reserve.”
The Financial Impact and Predictability
Financial planners recommend running a simple price-to-rent ratio analysis whereby you divide the home price by the annual rent of a comparable unit. If the ratio is less than 20%, buying/owning would probably be a better bet.
When you rent, you know exactly how much you’re going to spend on housing each month, although on rare occasions, renters could face unpredictable rent increase from time to time. Owning a home is associated with many upfront bills; on one month, you might only pay your mortgage or regular bills, the other month the roof could start leaking, the other month some renovations may come in handy; meaning more additional costs. Its therefore hard to predict the expenditure per month when a home is owned, as opposed to when its rented.
Stability Versus Flexibility
Home ownership brings intangible benefits such as a sense of stability, belonging to a community and pride of ownership. But other factors should be considered as well when making this decision. For instance, how long do you plan to stay in the area? Typically, the longer you plan to stay in a home, the more financial sense it makes to buy. However, for persons with a variety of work stations, home-ownership would not be such a good idea; it would be more practical to rent out as opposed to buying a home. Real estate is the original illiquid asset. You might not be able to sell when you want in case the housing market is down, and even if it’s up, there are significant transaction costs involved in the process. Changing your mind about where you want to live is far more expensive when you own.
Renting, on the other hand, means you can move without penalty each time your lease ends, but it also means you could have to move suddenly if the landlord/lady decides to sell the property, turn your apartment complex into condos or bump up the rent by more than you can afford.
Tax Benefits
Another bit of misleading conventional wisdom: Get a mortgage to get a tax deduction. True, the home mortgage interest deduction reduces your out-of-pocket expenses for mortgage interest early in your loan term (and the property tax deduction reduces property taxes), as long as you are itemizing. However, tax deductions are not a reason to buy a house. Here’s why; for every Ksh1 you spend in interest, you might save Ksh25 on your tax bill. You’re not coming out ahead. What’s more, as you pay down your mortgage and the proportion of your payment that covers interest decreases, so will the tax break.
Renters, in contrast, get no mortgage tax deduction at all. But they can take the standard deduction that's available to all taxpayers.
Buying Options
Buying a home involves serious financial considerations. Most people think in terms of mortgage loans, but there are other payment options as opposed to mortgage that may favour the buyer’s financial situation of other. Understanding the basic principles that come therein or the various payment options, before making the discussion would be apposite.
Builders have provided four payment plan options- Down-Payment Plan (DPP), Construction-Linked Plan (CLP), Flexi-Payment Plan (FLP) and Time-Linked Payment Plan (TLPP). Here is a brief description of each payment option:
Traditional down payment plans require you pay 10%-15% of the purchase price when you book your property/home, another 80%-90% within a given time-frame, say 45-60 days and the rest, at the time of possession. This remaining amount will include the balance amount of the cost of property and all charges levied by different authorities including Stamp Duty and Registration Fee, around 5% of the value of the property and maintenance charges e.g garbage collection and security charges. Risks involved in such cases include delay in construction and delivery of property that happens in most cases, actual delivered property differing from what was shown in the sample and increase in property prices by the time the house is officially yours . All these problems discourage buyers from buying property
Construction-linked plans require you paying a booking amount—around 10%-12% of the purchase price upfront while the rest is linked to construction milestones, 20% with each floor constructed, for example.
Flexi payment option, on the other hand, is a combination of both the above options, where the buyer has to pay about one-third of the price while booking and another one-third linked to milestones, while the remaining amount would be paid at the time of possession.
In comparison to one another, the construction-linked payment plan is more suitable than the other two since the risk is the least, if the payment is not timed and completely linked to construction completed. From the loan aspect however, construction linked loans are more expensive of the two, since that have a longer tenure; only interest payment is due till the property is under construction, principal repayment starts after possession.
Time linked-repayment plans: Repayment of these loans has to be made at a pre-decided point in time and in pre-decided proportion and are therefore riskier in terms of combating delay of construction. In case you pay 10% of the total amount at the time of booking and the rest at regular intervals of say, one year each, in three equal installments, your payments are not in tandem with the construction of the property. And according to the agreement, in case you fail to pay on time you are saddled with huge penalties that you accepted to pay it the time of signing the agreement.
The final decision of whether to buy or rent a house/home is ultimately upon you; and the above pointers will play a role in advising on the decision. All in all, whatever option you choose, ensure your finances and comfortability are in check.
Which option is best for you is not just about the money; it’s also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, that renting is throwing away money, or that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. The final decision is ultimately upon you; to know what works best for you and adopt it as your homeownership option. I believe the above pointers will aid in the decision-making process.
