In this segment of our renting versus owning series, we are looking at renting a medium-sized home versus purchasing a medium-sized home.

Specifically, we are discussing whether small families, those looking for three to four bedrooms, should rent or buy. This article applies to a couple with two children or maybe a new family who is expecting. Additionally, let’s not forget the young, established couples. The no-longer-single busy-bodies, hellbent on establishing their careers and doing it together. These are very future-minded, plan-driven couples that may want a larger home than they need for the investment, or who wish to use it as a comfortable hobbyist home until they’re ready for children.

Once again, there are other demographics buying homes, but we do not want to mix too many variables here. This segment is set apart because we are interested in comparing apples to apples. So let’s dive in to decide whether to rent or buy.

Cost of Renting

Renting an entire home usually does not make financial sense, but it may fit the current lifestyle of the tenant. Most homes in New Jersey require about 5 percent of the lease as security. However, in this state it is important to note that security deposits are limited to one-and-a half months of the rent requested. Note that loopholes involving rent-to-own purchases allow landlords to request a full 5 percent of the total lease. In addition, very few homes are listed for rent with the intention of renting long term. Often times, landlords are selling the home in the same condition they purchased it and refused to do any upgrades. Very often, homes for rent can be below the industry standard for quality. Furthermore, homes for rent often require that the tenants take care of some maintenance. Most tenants are looking to escape the demand of cutting the lawn or shoveling the snow; however, when renting a home, the landlord may require the tenant to accept these responsibilities.

Another hassle that comes with renting a home is the liability. This is a legal issue and because of my real estate license I cannot discuss it in detail. But to at least touch on it, the lease defines the tenant’s and the landlord’s responsibility for the house. Make sure you read it before you sign. Moreover, most people renting homes end up paying double insurance without realizing it. Most landlords require rental insurance to live in their home, but they also calculate their homeowner’s insurance into the price of the rent they request. If you think that is bad enough, the homeowners’ insurance of the landlord does not protect you and any of your stuff. You are effectively paying for it and getting no protection in return.

Now we get to a very personal subject for some, because they learned it the hard way. According to New Jersey real estate law, you as the tenant are responsible for paying your rental payment to the landlord, even if the landlord is not paying their mortgage. Pick an emoji and insert it here. It has been seen countless times when tenants are forcefully removed from their home because the landlord decided to pocket the rent money and not pay the mortgage, even though the tenants can prove they have paid the rent on time for years.

Cost of Owning

Most people are steered away from owning because they are not in the financial position to save up the down payment. On top of that, in New Jersey, the taxes make the difference in people’s mortgage pre-approvals and make it difficult to qualify for a mortgage with decent terms. Property taxes are one of the main factors when shopping for a home. Another qualifying factor that concerns buyers is PMI, or private mortgage insurance. As it stands now, until you have 80 percent loan-to-value, you are required by law to pay PMI. Recently, there have been rumors of the federal government removing the requirement for PMI, but until its signed into law it’s worth mentioning.

Additionally, a lot of people are not prepared for the maintenance required from owning a home. However, some are aware of the responsibility and are not interested in such a burden. Anyone who owns a home can attest to the change in lifestyle involving their Saturdays.

Benefits of Renting

When it comes to renting homes, typically the number one factor for the prospective tenant is the money they must present up front. Tied along with that is the credit qualification. The minimum credit to get a mortgage is 580, and even with that, most mortgage companies will not work with you until you achieve at least a 640. When renting, the qualification is not governed by law so the minimum is whatever the landlord is willing to accept. Also, there is a chance the landlord will cover the maintenance.

In today’s marketplace, some tenants choose to continue to rent because they feel a sense of anonymity. They feel like it is harder to track them. Some people find comfort in the fact that their lease is not public record, unlike mortgage filings. An additional benefit is the ability to test school districts. Keep in mind that this demographic includes new families and small families. Most people do not think about schools until they have children, and renting gives you the option to test the schools before committing to any of them. In the same sense, it also allows tenants to feel out the culture. That may be more of a benefit to the young, established couples without children.

Benefits of Owning

The number one reason to own is equity. Every time you pay your mortgage, you are essentially depositing money into a bank account called equity. The more payments you make, the more money you deposit. Even better, you have the ability to write off the mortgage interest every month. For the first decade of a 30-year mortgage your payments are mostly interest. Another benefit is you do not need permission to customize your home in order to make it your own. You want to paint a room pink? Go for it. That trendy shade of green appeals to you? Take the leap. No one can stop you. Most likely the biggest benefit is the ability to define children’s areas or office space. No one can stop you from adding a bookshelf or a cubby. The additional tax breaks for a defined space can help as well. Consult a licensed CPA for more info.

Now for the hidden gem most first-time homebuyers do not think about. When you finally outgrow your current home and are ready to move up, the additional equity you have built up can be used as the down payment, instead of trying to save it all. Maybe your children are attending a more expensive school than you planned for; use the equity to help pay tuition. You can tap into this asset for future expenses, even if you need help paying the mortgage.

In this segment, it is not easy to define a clear winner when debating renting or buying. In other states where the taxes and cost of living are lower, renting may work. However, in New Jersey, owning has the benefit because of the financial benefit after a few years of payments. Ultimately, rents will continually go up, but you can refinance to lower your mortgage payment. To the contrary, renting only serves a lifestyle benefit, should the landlord handle all of the maintenance.

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