Renting or buying a home: the costs outside the monthly payment

The question "is it better to rent or buy?" is usually answered by comparing the rent with the mortgage payment. But that comparison leaves out many costs, on both sides. A good decision considers the full picture and your life situation.

Criteria for comparison

Costs of buying left out of the payment

• Down payment and acquisition costs. Down payment, taxes and transfer fees, notary, appraisal and paperwork.
• Recurring taxes and fees. Property tax and homeowners' association fees, when applicable.
• Maintenance and repairs. On the owner.
• Insurance. Which may be required by the loan.
• Opportunity cost of the down payment. The money could earn in another investment.
• Cost of selling. Fees, commissions and taxes on any gain.
• Change in the property's value. It can rise or fall, and is not guaranteed.

Costs of renting left out of the rent

• Increases. Rent is usually adjusted periodically.
• Guarantee and entry costs. Deposit, guarantor, rental insurance and fees.
• Moves. The cost of moving from time to time.
• Association fees and taxes. May be charged to the tenant, depending on the contract.
• No equity in the property. The rent money does not turn into an asset.
• Long-term uncertainty. The chance that the contract is not renewed or that the price rises.

Pros and limits

Buying

Pros: building equity, stability, freedom to modify the property. Limits: a long financial commitment, less mobility, maintenance costs and the risk of value changes.

Renting

Pros: mobility, less capital tied up, the chance to invest the difference. Limits: does not build equity in the property, increases and uncertainty about staying.

An example

Two people compare an apartment to live in. Renting costs 2,000 a month. The loan payment would be 2,400, plus fees, taxes, maintenance and a down payment of 60,000. Adding everything, the monthly cost of buying is higher than the payment shows. If they plan to stay many years, buying may make sense; if they might move cities in a few years, renting may be safer. The numbers are illustrative.

How to decide

1. Define your horizon. How many years do you plan to stay?
2. Add up all costs on both sides. Over, for example, five and ten years.
3. Estimate the opportunity cost of the down payment.
4. Consider the stability of your income.
5. Consider your lifestyle. Mobility, need to adapt the space, safety.
6. Seek guidance. An independent financial or real estate professional can help.

This text is educational and is not a recommendation to buy or rent.