To buy or rent your home? It's more than a matter of money

For some people, deciding whether to buy or rent their home has nothing to do with finances. With one couple, for instance, the decision was easier to make when the owner of a house they were renting refused to fix a leaky boiler that blew jets of water all over the basement.

Not everyone needs a flooded basement to push him into home ownership, but the tale does show that both personal and financial factors can shape a rent-or-buy decision.

``The first thing you need to consider is, will it cost you less to buy than to rent,'' says Joel Norwood of BNR Realty Inc. in Washington, D.C. Buying is clearly not the right course for everyone.

Cost is one factor. To become and remain a homeowner, a person pays fees for title searches and property inspections, closing costs, monthly mortgage payments, and maintenance expenses. A renter pays the monthly bill, a security deposit, and sometimes a finder's fee.

Before buying a home, people should study an area's job availability, economic growth, school districts, housing turnover rate, and housing standards. ``There are thousands of housing markets, and each has a unique characteristic,'' says Jay Shackford of the National Association of Home Builders (NAHB).

The Washington, D.C., area, for example, has a good track record, Mr. Shackford says, because it has a high turnover rate. Real estate costs in Boston have gone through the roof, partly because of the condominium conversion craze. Until two years ago, the Houston area was strong, but now it is going through an economic wringer. ``You almost have coastal economies; the energy-producing states are hurting,'' Shackford notes.

The inflation rate also affects buying decisions. When inflation is high, nonfinancial assets are good investments, because they are hedges, explains financial planner Eileen Sharkey, of E. M. Sharkey & Associates, in Denver. ``Yet, when inflation is low, every other possible investment competes for a person's investment dollar. Real estate is no more appealing than stock, and real estate is nonliquid on top of that.''

The decision to rent or buy is based as much on a person's life style as finances, Ms. Sharkey adds. A two-career couple may not want the hassle of keeping up a yard, so they rent. Renting gives a person more flexibility. ``In most markets it doesn't make sense to buy unless you'll be there three to five years,'' she points out.

But Sharkey says that ``if you really want a house, you'll find a way to get it. [But] you must ask yourself if the downsides of owning outweigh the positives.''

Financial planner Bill Carter, of Carter Financial Management in Dallas, says the desire to own sometimes overshadows all other factors. ``In Texas, home ownership generally has been taken for granted,'' he notes. ``We advise young couples particularly not to feel so obligated to get house poor.''

Still, the opportunity to build up equity, the pride of ownership, and the deductions the tax reform bill allows all combine to make a strong case for ownership.

A home is a tangible asset in which equity builds. ``A $100,000 home is one of the few investments where a family can actually leverage itself,'' Shackford explains. ``For a down payment of $10,000, the family is building equity in a piece of property worth $100,000.''

Ownership also gives more control over costs. Tenants may have to do minor maintenance, or it may take a landlord a while to get repairs done, says Mr. Norwood. ``On the other hand, in owning, the cost incurred improves your investment. When you own, you're not subject to the whims of a third party, a landlord who wants to increase your rent.''

The current level of mortgage rates, around 10 percent, has encouraged many people to take on or refinance a mortgage, according to Nathan Schloss, senior vice-president at the Real Estate Research Corporation, in Chicago. ``Rates won't go much lower,'' he believes.

A mortgage gives an owner advantages for other financing. ``You can refinance a mortgage up to the original purchase price plus major improvements,'' Mr. Schloss notes. ``You can use your house as collateral, and you can extend the home loan for a valid educational purpose or major medical payments.''

Once people have paid off a mortgage, they should consider holding on to their house. Sharkey offers the case of people who are retiring and want to move from Minnesota to Florida. ``What if they don't like Florida? They should consider holding on to their house in the North, because it's paid for.'' Instead, she suggests traveling in the winter and living in the home in the summer.

A joint venture with the children also allows parents to keep the house. Parents sell the house to the children, who lease it back, and the parents don't move.

The Tax Reform Act has reinforced many people's beliefs in the value of owning property. Although the bill eliminates most deductions and preferences, two of the few deductions left are for mortgage interest on primary and secondary homes, and property taxes.

``These two deductions give a market perception that makes owning appealing,'' says NAHB's Shackford. ``We think single-family housing comes out unscathed basically.''

Schloss thinks the tax bill should help increase the market for starter homes. ``There's a real inducement for people to buy,'' he says. ``The government has made a public statement about the value of owning, and Congress has given people every relative opportunity to buy.''

What the tax bill does to rental housing is another matter. Because accelerated-depreciation provisions and capital gains are eliminated, Shackford thinks fewer rental units will be constructed, so rents will go up.

Tax reform is also encouraging investors to sell property. In the late 1970s, many investors bought units, and used the depreciation deductions.

``But the tax advantages are winding down. It's advantageous for owners to sell now, and there are less investment units for rent as many owner/occupants are now buying units,'' Norwood says.

``The economics of supply and demand may lead to a substantial increase in rents,'' he adds.

For people choosing between renting and buying, the tax bill will push them to buy, because ``some people will fall further behind [in buying a home],'' says Shackford. ``Higher rents will make it harder to get a down payment. There's a hidden tax on renters.''