The Pros and Cons of Buying Real Estate

Buying a home is a common part of many American’s financial journey.  Buying a piece of property – whether it’s your primary residence or an investment property – can be a good investment.  This is because real estate values tend to increase over time and, if you rent it out your real estate, you can bring in more income every month than the expenses cost.  However being a property owner or landlord isn’t always a good fit for everyone.   Here are some of the pros and cons of buying real estate.

The Pros of Buying Real Estate

More Freedom: When you purchase a primary residence the property is your own.  You no longer need to deal with rental agreements, annual lease renewals (I know because I bought my place back in 2015) and landlords.  You own the property and land and you’re free to do as you please with it, as long as it’s allowed under city bylaws.

Homes Increase In Value: Even if the value of your property decreases over time due to the economy, city and neighborhood it is very unlikely that your property will ever be worth $0.  This means that buying real estate will usually increase your net worth, especially as the years pass and your mortgage loan value decreases.  The value of your net worth is the total value of your assets minus your debts.  If the mortgage loan on your property is paid off then your net worth increases based on the current market value of the home.

Mortgage Payments Work In Your Favor:  While mortgage payments are a net loss, they’re preferable to rent payments. Renting is like throwing away money because you’re paying someone else to live in their property.  When you’re the property owner you are paying a mortgage loan to the bank and if you’ve bought a rental property then a tenant is paying you. Both of these result in better long term results for owners.

You Can Borrow Against Your Real Estate: Real estate can also be used as collateral.  This means you can borrow against the equity in your home.  This gives you more options than renters.

Tax Benefits:  Another major pro of buying real estate is the tax benefits.  In the United States, interest paid on a mortgage is deductible, as are property taxes in many cases.

The Cons of Buying Real Estate

You Have To Do All the Work: When you’re the property owner there isn’t a landlord who you can call when something goes wrong such as if a pipe bursts or if the hot water heater breaks down.  The cost of home repairs and upkeep can quickly add up and that can be an expense home owners just aren’t ready for.  This is why it’s important to have an emergency savings fund for your home – just in case the unexpected pops up.

Owning is Expensive: Owning is mentally expensive. Having a mortgage payment, negotiating interest rates with your bank and saving for a down payment can be stressful.  Owning is also financially expensive, In addition to the monthly utilities (i.e. heat and hot water) and the mortgage payment there are other costs associated with owning a property such as property taxes.  Keep this in mind if you’re thinking of buying real estate.

In contrast, renters have fixed costs. When you’re renting you just have one payment to make every month – the rent.  You don’t need to worry about things like property taxes and down payment when you’re a renter.  This is why the carefree and no-responsibility lifestyle of renters may be preferred.

Real Estate Has High Transaction Costs: Since most people only purchase a small number of homes in their lifetime, realtors and lenders have little incentive to reduce transaction costs.  Real estate can cost up to 6% of the value of the home to sell. In some states, such as California, state governments charge thousands of dollars in transaction fees.

What’s Better? Owning or Not?

On balance, if you plan to stay in your home for the next couple of years, its far better to own than rent.  This is because owning gives you appreciation advantages, tax advantages and flexibility that renting does not.

Do you rent or own your home?

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