Planning a move is stressful and expensive, and it’s becoming even tougher for first-time home buyers.
A recent report from Zillow found the average American needs to earn more than $106,000 per year to comfortably afford a home. That’s a massive jump from the $59,000 annual income needed in 2020 — an 80% increase in just four years, and it appears Americans’ average yearly income isn’t keeping up.
The median household income currently falls around $74,500, according to the U.S. Census Bureau. For years, experts have said purchasing a home is a good investment, but when you compare the salary needed to buy a home vs the salary the average American makes, it seems nearly impossible. So is renting a better alternative? Well, it depends.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Like everything else, rent prices have also been climbing over the years. Data from Rent.com found the median price of an apartment in February was $1,981. That’s a 21% increase from pre-pandemic levels, when the median cost was $1,637 in March 2019. With both options taking a huge bite from your paycheck, there are other factors you’ll want to consider when choosing whether to buy or rent.
Investing in a home
As mentioned earlier, buying a home is an investment. It allows you to build equity and credit and provides you with possible tax credits depending on your situation. But your mortgage payment isn’t the only cost you need to worry about.
Buying a home requires a substantial down payment, which could eliminate your chances of getting approved for a mortgage if you don’t have enough saved. In addition to that, you’ll be responsible for property taxes, utilities and any maintenance work the house needs, and that can run into a lot of money, depending on the condition of the home.
You may also be responsible for homeowner association (HOA) fees, depending on the neighborhood you live in. And if home values decline, your resale value could be less than the original cost of the home. Although buying allows you to have more freedom with what you do with your home, with more power comes more responsibility.
Renting takes a little bit of that responsibility off your plate. As a renter, you’re not required to make a huge down payment, although you may have to put down a security deposit. You also don’t have to worry about property taxes or the cost of maintenance and repairs. Some property managers may require you to purchase renters’ insurance, though, which can be bundled with your auto insurance. You also have the potential of building credit if your landlord reports rent payments to credit bureaus. But the lack of responsibility renting provides comes at a cost.
Some decisions are out of your hands
Unlike a fixed mortgage, the cost to rent is solely dependent on your landlord. If your landlord chooses to raise your rent, it could exceed your budget, forcing you to move out or risk eviction.
In that same vein, you could be forced to move if your landlord sells the property. You also forfeit building up personal equity, adding to your landlord’s equity instead, and there are no tax benefits. You also run the risk of being waitlisted in markets that have limited vacancies, which can delay your move entirely.
Choosing whether to rent or buy a home is a decision that is uniquely yours. To help you make the right choice for your situation, consider asking yourself the following questions:
- How much can you afford to pay in monthly housing costs?
- How long are you planning to live in the area?
- Is flexibility or stability more important?
- Can you afford unexpected maintenance/repairs costs?
- How much are property taxes, and do you qualify for any tax credits?
- What are your future goals?
Making a move is a big step for everyone, despite where you may be in life. It’s a decision that carries financial implications that can impact your lifestyle and overall well-being. To help you make the right choice, consider all of your options and evaluate the pros and cons.
It may be worth consulting with a financial adviser and a real estate agent. They can help you review your finances and provide information about the cost of living in your prospective market, giving you the ability to make an informed decision that best suits you.
Justin Stivers is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Stivers Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Related Content
-
RH Fell Short on Earnings But Its Stock Is Up. Here's WhyRH stock is one of the biggest percentage gainers Friday as the home furnishings retailer's upbeat outlook offsets an earnings miss.
-
Is Costco Stock Still a Buy After Earnings?Costco stock is slightly higher Friday after the warehouse club beat expectations for its fiscal first quarter. Here's what Wall Street has to say.
-
Do You Feel Like Somebody’s Watching You? It's Your CarWhat's worse, you gave your vehicle manufacturer permission to watch you — no matter what you're doing. What are the car companies doing with that information?
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
-
LLCs: Power Tools That Can Create Big ProblemsForming an LLC for your business might seem like a straightforward endeavor, but if you don't know exactly what you're doing, trouble could follow.
-
Never Talk About Money? For Women, That Can Spell DisasterHow can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
-
How Combining Your Home Equity and IRA Can Supercharge Your RetirementWhile many retirees own an IRA and a home, very few are considering how they could work together in a plan for retirement income.
