When you move out on your own, you’re responsible for managing your money and making decisions that impact your financial standing. Arguably the biggest decision you need to make is where you will live and whether you will buy a home or rent. This is not a decision to take lightly. There are financial and emotional factors that will dictate which option is best for you.
Consider the Finances Behind Buying and Renting
When you consider homeownership, especially in California, keep in mind the significant financial commitment. Not only do you have the long-term obligations of your mortgage, insurance and property taxes, but you need to pay for regular maintenance. When buying a home, you will need a down payment of anywhere between 5% and 20% plus money to cover the closing costs.
There are multiple theories about how much of your gross monthly income should be devoted to your mortgage (some say no more than 28%) and overall debt (no more than 36%) to keep you from financial straits. But there are homeowners in the Bay Area and Silicon Valley who exceed that threshold and don’t mind being “house poor,” meaning they’ve purchased a property at their budget ceiling or beyond believing they will earn more money as their career grows and their home’s value will appreciate.
The costs associated with buying and maintaining a home exceed the short-term costs of a security deposit and monthly rent in California, in most cases. Rent is more of a fixed budget item than owning a home, and the occasional rent hikes probably won’t exceed the cost of replacing a roof.
Owning a home means you can build equity if you hold it long enough and it appreciates in value. You also might receive some tax advantages by owning, and your home could turn out to be a fantastic investment if you sell it after it has appreciated significantly, but this isn’t guaranteed. Keep in mind, you also could rent and invest the extra money you would’ve otherwise spent on owning your home.
Personal Preferences and Emotions Become Factors
Whether to buy or rent also comes down to personal preferences. If you’re interested in living in an urban center, renting might be your best option. If you want quiet space in the country or suburbs, buying a home might make more sense.
Owning a home unquestionably requires your time and money. Someone needs to cut the grass and make house repairs that inevitably pop up. If you don’t want to devote some of your spare time to these projects, renting allows you to call the landlord and be done with it. Then again, you may be in a financial position to own a home and simply hire others to take care of your maintenance projects. With this point, you need to determine what your time is worth and whether it’s better spent on home maintenance or something else.
Another consideration is amenities. If you enjoy a large swimming pool, gym and valet parking, it’s cheaper to rent in a community that provides these perks than buy a home and build a pool or gym and hire someone to pull your vehicle into your garage. On the flip side, owning a home allows you to add a patio and outdoor fireplace in your yard whenever you feel like it, something you likely won’t be able to do as a renter. Here, you need to weigh customizing your own space against living with less worry.
If you plan on switching jobs and moving to different parts of the country, renting allows more flexibility because breaking a lease doesn’t burden you with a huge financial obligation. If you own a home and decide to move, you’ll need to coordinate the sale of your current home and your purchase or rental in your new location. There are multiple moving parts and trying to calibrate the timing of everything can lead to a lot of stress.
Home ownership can provide emotional satisfaction that you might not experience when renting. Owning a home means you’re investing in a neighborhood and you can feel a closer connection to your neighbors and community because of your commitment. That said, you’ll likely worry more about local politics that affect property and zoning, and you’ll want neighbors who respect their properties in order to maintain the neighborhood’s value. As a renter, you can simply leave if you grow dissatisfied with your neighborhood.
Weigh all of the personal and financial factors that apply to you to determine whether buying or renting your California residence is the best choice.