To buy or rent a home?
MANILA, Philippines - Are you looking for a new place to stay? After checking at options out there, chances are, you’ve asked yourself if you are better off renting, especially if the homes you like are out of your budget range.
Often, renters say that they would prefer that their monthly payments go into something that they would eventually end up owning.
While this sounds logical, there are other considerations to look at because buying and renting a house are very different in various aspects.
Purchasing a house is a dream for many people but it also requires a long-term commitment, which not everyone may be able to make given their present circumstances. Renting, on the other hand, confers you with flexibility and mobility.
There are no hard and fast rules in making a sound decision. Since your circumstances are different from that of your neighbor’s, what will work for him may not necessarily work for you. To illustrate, your neighbor may be planning to migrate in two years. Therefore, renting is the most flexible and practical option for him. In contrast, you may be thinking of having a place that your extended family can stay in for the next 20 years, which makes home ownership a feasible option.
Let’s look at how renting and buying a house vary in different aspects:
· Time horizon: If you buy a house, it’s yours forever and you can pass it on to your children. If you rent, your landlord can ask you to leave the unit if he needs it.
· Upfront costs: A house is a major purchase. A 20-square meter unit in the business districts of Metro Manila can easily cost P1 million. Even if you make the purchase via a loan or through installment, you would still make a downpayment of anywhere around 20% of actual purchase price. In contrast, if you plan to rent, you will have to pay a few months’ deposit and a cash advance—a sum which will be far less than what you would shell out for a purchase.
· Documentation requirements: To purchase a house, you would need to do some paperwork involving the transfer of the title to your name, and pay taxes as well. Additional paper work is involved if you are taking out a loan for this house. If you will be renting, the only documentation involved will be drawing up the rental or lease contract.
· Maintenance and other costs: Expect to spend on maintenance works regularly for your own home, whether it is for leaky pipes, water logged ceilings, rusty grills, and many others. You will also need to pay property taxes and subdivision dues yearly. When renting, the property owner usually covers maintenance costs and tax payments.
· Monthly payments: If you purchased your home through a loan, then you would be making regular monthly payments until the loan has been paid in full, after which there would be no more amortizations to make. If you are renting, then you will be paying for as long as you are using the place, regardless of how long you have stayed there. Note that your yearly payments would most likely increase, with many landlords reserving the right to increase rental prices upon contract renewal.
· Property appreciation: Purchasing your home allows you to enjoy a possible appreciation in its property value, which would be to your benefit if you are considering reselling the property in the future. If you will make it your permanent residence, its appreciation will be reflected as an increase in your assets but there might be no impact on your cash flow. If renting, the appreciation of property values will be of no relevance to you.
You can see from these points that the choice is not so simple. When making your decision, take a good look at your life and financial plans, and do not act in haste. Consider the following:
Your personal circumstances:
· Are you single and living by yourself or do you have children and are planning to expand your family? If you are single and have no plans of having children anytime soon, then you have to think of what will happen to your house if you pass away.
· Do you have a steady source of income? Whether renting or buying, you would need to have a steady source of funds to make payments. If you plan to make a purchase, there may be balloon payments in the future that you have to be ready for. Also remember that if you default on a payment, there may be charges and you risk foreclosure, which may mean losing all the payments made for the property.
· Do you plan to move out of your current location? If you plan to move around the country or the world, note that it takes time to dispose off property. Having it rented out may also be cumbersome on your part if there is no one to deal with management of the property.
· Finally, how does this purchase impact your plans for your family over the short-, medium- and long term?
Your current finances: Can you afford to buy a house or at take out a loan? Most financial experts say that you should spend no more than one-third of your joint take home pay for housing amortization. Given this formula, how much in monthly payments can you afford? This will tell you if you can make let’s say, P30,000 in monthly amortizations for a housing rental, or P10,000 in monthly rentals.
Your investment plans: If you are planning to acquire assets for investment purposes, a house purchase may qualify as one. In general, property price appreciation is dependent on many factors, including supply and demand, location, and others.
An informed decision is always the best one to make – good luck!
Grow Your Money is an editorial partnership between ABS-CBNnews.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
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