Should I Rent or Buy a House in California?
One of the biggest questions prospective homebuyers ask themselves is if they should rent or buy a house in California. It is a question not easily answered, and shouldn’t be taken lightly.
Historically, homeownership was part of the American dream. It still is a significant source of household wealth creation. Not only for California, but the rest of the United States.
“Homeownership plays a pivotal role in the U.S. economy and has historically been one of the primary sources of wealth accumulation for middle-class families,” – Lawrence Yun, NAR Chief Economist.
But, is it still better to buy ? If so, why? Nowadays it seems that there are a growing number of people that prefer to rent.
The answer: it depends.
The Rent vs Buy Debate
Neither option is fundamentally right or wrong. Answering the question “should I rent or buy a house” in California is a personal decision. You need to consider the factors that matter most to you. If you don’t consider your personal circumstances, neither option is better than the other. What’s more, the discussion is irrelevant if you don’t know if you can qualify to buy a home.
When you are trying to decide if you should rent or buy, here are just a few things that you need to consider for your personal situation.
How long do you plan to live in the home? If you don’t plan on living in the home for a long time, then it might make better sense to rent. There’s no return on investment if you aren’t in the home long enough. And you won’t be able to take full advantage of appreciation.
Does your career or lifestyle require you to relocate frequently? If so, you may not want to buy a home because you’ll lose flexibility. Do you want that responsibility of selling your house and relocating every time you move for work?
Does the cost of housing where you live in California support your decision? If it is cheaper to rent than to own in your area, then it makes the decision much easier. Many people decide to rent because it can be (but isn’t always) cheaper than buying. When calculating the cost of homeownership, you have to consider the down payment (get money for your down payment here), closing costs (a savvy real estate agent can negotiate so the seller pays your closing costs), your monthly mortgage payment, and other recurring costs such as taxes, insurance, mortgage insurance, HOA fees and maintenance. You should consider the tax deductions you obtain when buying. And you should try to estimate how much the house will go up in value, and how much it will cost to sell the home. Do you know the cost of buying a house in California? On the other hand, buying a home gives you stability and predictability with your mortgage payment. You don’t have as much control over rental rates and how much they increase year over year.
Pros and Cons of Renting
Some of the advantages (pros) of renting a home include the following:
- Qualifying is easier – When you rent a home, you still have to qualify for it. The requirements tend to be much less stringent than buying. Typically, if you are looking to rent, you will have to show that you have a job, make enough money for rent payments, you have adequate credit, no history of evictions and no criminal history. You’ll also have to provide a security deposit.
- Real estate market doesn’t matter – Values of homes increase and decrease with supply and demand. If you rent a home, you don’t have to worry about it. Whether the home increases or decreases in value, your rent remains the same for the length of your lease.
- Maintenance costs don’t apply – In most cases, you don’t have to worry about normal maintenance costs. If the plumbing stops working or your air conditioning system breaks down, it is the landlord’s responsibility to fix it.
- Moving is simple – If you want to or have to move, it is usually much easier when you rent. You don’t have to worry about putting the house up for sale and finding the perfect buyer. You should wait until the end of your rental lease, but even this is not a requirement if you have to move quickly.
Renting can have its drawbacks. Some of the disadvantages (cons) related to renting include the following:
- No return on your investment – The largest disadvantage of renting is the lack of a return on your investment. You pay rent every month, but do not gain any equity in the home or see any type of return. When you move, you hand over the keys and walk away with nothing.
- Higher tax liability – A person who rents a home does not receive any tax deductions, such as for interest or points paid. If the same person owned a home, he would have a lower tax liability because of the deductions given to homeowners.
- Higher rents – Your landlord has control over rent. Once you sign a lease, your rent remains stable for the duration of the contract. However, once the lease ends, the landlord can increase your rent if he feels he should. This differs from someone with fixed rate mortgage who has predictable payments for the next 30 years. Don’t forget that Phoenix has recently had the highest rental rate increases in the country.
- Approval for changes – You cannot make any changes you desire to a home you rent. The landlord must approve most changes that have a long-term effect on the home. This can limit your ability to make it feel like home.
Pros and Cons of Buying
There are many advantages (pros) related to buying a home. Here are some of the most popular benefits to buying a home:
- Stability and security — Your home is a place to call your own. Owning a home can provide a feeling of comfort and stability. There’s a feeling of belonging and sense of community as you plant roots and create strong ties with family, friends and neighbors.
- Personalization — It’s your home. You can do what you want to it. This is a pretty simple concept, but it is significantly different from renting. If you want to repaint, you can. If you want to install different flooring, you can. If you want to remodel the home, you can.
- Buying a home builds wealth – Buying a home means you own it. Right off the bat, you only own the portion for which you put a down payment on, but eventually you build up equity. As you pay the principal portion of your mortgage, you gain more ownership in your home.
- Tax Benefits – There are many tax advantages to owning a home. You may be eligible for certain deductions on your taxes including the interest and points deduction.
The disadvantages (cons) of buying a home include the following:
- Upfront costs are high – Getting into the home when you purchase it can be costly. Not only do you have to put money down on the home, but you also have to pay closing costs. Get down payment assistance here. Plus, once you buy the house, you will probably spend money to fix it to your liking and buy equipment to maintain it.
- Qualifying is harder – You have to qualify to purchase a home unless you pay cash. This means you have to find a mortgage program that you qualify to receive. You need good credit, decent assets, a stable income, and minimal debts in most cases.
- Unexpected expenses – As a homeowner, you are responsible for the maintenance and repair costs. This might not matter when you first move in, but things can break and need repair or replacement, adding to the overall cost.
- Dependent on the market – When you buy a home, you are reliant on the market. If housing prices dip, you could lose some of your equity. It is a risky investment that usually pays off in the long run, but you cannot predict how the industry will fare in the future.
Rent vs Buy Calculator
If you’re still not sure if you should rent or buy a house in California after considering all of the pros and cons, you can use a Rent vs Buy calculator. This is different from your typical California mortgage calculator.
A rent vs buy calculator compares the total cost of renting with the total cost of buying to help you make the right decision.
The best calculators will consider various factors such as opportunity costs, anticipated appreciation, tax breaks, etc. Some will use a net present value calculation to compare the total costs over time.
What is Keeping You From Buying a House in California?
If you need help with down payment assistance, we can help.
If you need help getting meeting the requirements to qualify for a loan, we can help.