There is no blanket statement that buying always makes more financial sense. If you are ready to commit for the long term, have job security, and have the budget to support a mortgage, ownership could be right for you.

But renting can be a great choice, too. It depends on your location and circumstances.

Cost of Ownership

The cost of owning a home goes far beyond the initial purchase price. A new study reveals that homeowners spend an average of $15,000 per year on maintenance and other costs. This is not including the mortgage payment, which is often the largest component of a monthly home budget. These hidden costs can catch some people off guard and result in buyer’s remorse, especially among millennials.

A better way to determine the real cost of an asset is to use the total cost of ownership (TCO) method. TCO is an analysis that reveals all the direct, indirect and hidden costs associated with a purchase. It is a useful tool for decision-making, as it allows companies to identify potential losses from a costly purchase. The formula to calculate TCO is simple: the initial purchase value is added to all the hidden costs and subtracted from a projected resale or residual value at the end of an asset’s lifespan.

TCO is a comprehensive analysis that goes beyond the initial purchase price to include all the costs associated with purchasing, operating, and maintaining an asset or product over its lifetime. This includes both direct and indirect costs, including training, documentation, and other related expenses. It also includes depreciation and amortization, as well as the impact of financing methods. The TCO concept is widely used in business contexts, such as when analyzing large capital purchases or conducting cost-benefit analyses.

It is important to consider the long-term benefits of a purchase before making a decision. For example, buying a home can save you money in the long run and build equity in your home. However, renting may be a smarter option for people who plan to move frequently or have limited financial resources. It also allows you to build a good credit history and avoid the hassle of repairing or renovating your house. However, renting comes with its own set of disadvantages, including lower flexibility and transaction costs. If you are unsure whether to buy or rent, consult with a financial advisor. Then, you can make an informed decision.

Taxes

Unlike renters, homeowners are responsible for property taxes, which typically range from 0.5 to 1% of a home’s value. These are levied by local governments to help fund essential infrastructure and services. While these costs can be substantial, they are also tax deductible, provided that homeowners itemize their deductions rather than take the standard deduction.

When building a financial model that compares buying vs. renting, it’s important to factor in these expenses. Forgetting to include these costs can dramatically alter the outcome of a buy versus rent scenario.

Additionally, it’s important to remember that homeownership comes with sundry transactional fees such as a home inspection, attorney fees, mortgage closing fees and other associated expenses. While these fees do add up, they are also a cost that must be considered in the overall picture since they represent money forgone, which could have been invested elsewhere with a higher return. Ultimately, the choice to buy or rent comes down to lifestyle, finances and personal priorities.

Maintenance

Buying a home comes with maintenance expenses you may not face as a renter. This includes things like home insurance, property taxes and homeowner’s association fees. Homeowners are also responsible for paying utility bills like electricity, water and sewage. These costs are often higher than what you pay when renting, so they’re important to keep in mind if you’re thinking about making the buy-versus-rent decision.

Buying offers some advantages, including building equity and having the option to resell the property in the future. But it can also come with downsides, like maintenance costs and nosy neighbors. It’s best to weigh the pros and cons before deciding whether to buy or rent. The state of the housing market and availability of homes can also impact your decision.