Should you buy or rent after selling your home?
In this article:
Your home is on the market, and you can probably count on moving soon. But if you are not already under contract to buy your next property, what’s next? Should you buy or rent after selling your home?
- How much will you receive from the sale of your current house? And what’s the best way to use the money?
- Are you moving to a new area? Renting may make sense until you get the lay of the land
- The time you expect to stay in your next residence matters
Of course, check current mortgage rates unless you can pay cash. They significantly influence the cost of homeownership.Verify your new rate (Nov 19th, 2019)
Spoiler alert! When you click on a headline posed as a question on a news story, the answer is No. “Is Angela Merkel a secret Muslim?” No. “Are aliens running MIT?” No. Just occasionally, the answer is, “Your guess is as good as ours” (as in, “Will this winter be the worst on record?”) but it’s nearly always No.
It’s different when the headline-as-question is atop an article on personal finance issues. The answer then is almost invariably “It depends.” But typically, that’s okay, because the article can explain what the answer depends on, and guide you through the process of making an informed decision.
That’s the aim here. Should you buy or rent after selling your home? It depends. But read on to answer the question intelligently for yourself.
How long you’ll live in your next home
In April 2018, USA Today quoted a study of home sellers’ costs. It reckoned the average across America at that time was $18,342. But that average covered broad variations. In some markets, you could pay less than half that. In the hottest one (San Jose, CA), it was just north of $73,500.
And that’s just the cost of selling. If you’re also buying, you can typically add many thousands (2-5 percent of the purchase price) in closing costs to your selling tab.
How costs affect whether you buy or rent after selling
If you’re planning to live in the home you buy for a decade or more, these costs remain painful. But you’re spreading them over a long period, which eases that pain. All you can do is shrug and see them as the price of being a homeowner. Over that time, there will likely be plenty of compensations to make you forget them.
But suppose your employer sends you on a two-year posting to San Jose. And, after that, you’re almost sure you’ll get moved somewhere else. Suddenly, those costs are in danger of creeping into six figures. Spread over just 24 months, that’s a huge expense.
But might it be worth it? Might home price inflation be so rapid as to make the cost of moving affordable? That brings us to the next point …
Know the markets
When deciding whether to buy or rent after selling, you need to get a feel for two markets in the place you want to move. First, is the residential sales market. Is it hot or not?
What’s a realistic estimate for the money you stand to make in home price appreciation while you live there? Is it more or less than the costs of buying and selling? And how do those stack up compared to the cost of renting over the period you expect to live there?
Secondly, you have to look at the rental market. What will it cost you to rent each month? How much might that increase or decrease while you’re living there? How much might you miss out on in the appreciation of home values by being a renter?
Clearly, all these figures are merely guesstimates. But if you refine them as best you can — by talking to real estate agents and researching online — you won’t be able to blame yourself later if your decision lands you with a hefty loss. On the other hand, failing to do any due diligence means you’re on your own personal hook for a bad choice.
Should you rent while you hunt for your next home?
When you’re moving far away, renting for six months can be a great idea. You get to explore different neighborhoods and pick one that’s just right for you. And you’re on hand to view quickly hot properties as they land on the market. How much better is that than buying the wrong place and then having all the hassle and expense of moving again?
But before you decide to do that, you need to take into account local conditions in the property market. If those are cool, and home prices are near-stagnant, there’s little risk in renting for a while.
But, if the market’s hot and prices are soaring, you want to enjoy the benefits of that as quickly as you can. You certainly don’t want to see homes you could originally have afforded racing out of your reach.
What else you’ll do with the money
We tend to think of homeownership as a safe but unexciting investment. And that’s true. Especially if you’re careful about when you pick your start and end points, it’s easy to prove that, on average, stock markets give better returns than property ownership.
But, at least over the long term, risk and return are closely related. Yes, home prices can slump, but so far always temporarily. But stock market collapses, rare as they are, wipe out fortunes.
Paying down high-interest debt
It’s a wholly different thing if you’re burdened with high-interest debt.
Suppose you’re deciding whether to buy or rent after selling at a time when you owe tens of thousands in credit card balances that carry APRs of 17 or 18 percent. Or thousands on store cards at closer to 30 percent. Those sorts of sums can mean your minimum payments leave you with very little disposable income at the end of each month.
It may well make sense for you to use some or all the equity you’ve built up in your current home to become debt-free. Of course, exiting the property market comes with risks. Suppose home prices or mortgage rates suddenly rocket. You’ll be exposed to risks from which you’re currently protected.
However, the advantages may well outweigh those risks. You’ll be living with much less stress. And, assuming you stick to a realistic household budget, your credit score will likely benefit considerably. So you’ll be a more attractive borrower when you next come to apply for a mortgage.
All this may mean you get almost as good a deal as you currently have, even if mortgage rates have moved up in the meantime. Oh, and after three years of renting, many lenders and programs give you first-time buyer privileges, even if you previously owned your own home.
You see? The decision to buy or rent after selling does depend — on many factors. Those are principally your personal financial circumstances and needs, and market conditions where you want to buy.