Should you consider building a house instead of renting? This is a question that the majority of people face at some point in life. Housing is a basic need making it a necessary element to factor during financial planning.
This question to rent or to build is driven by the rush to prudent financial management. Building housing is a capital-intensive project that requires proper considerations before committing.
There are different ways to solve your housing needs. You can either choose to rent/lease or to build/buy the house. Each of these options has its advantages and disadvantages. Although renting is cheaper in the short term, it could become an expensive option in the long term.
Studies have shown that it is better to build instead of renting in the long term. However, this is based on some factors such as the availability of capital and land. This article will focus to highlight why you should consider building a house instead of renting.
Advantages of Building a House to Renting
1. It is cheaper in the long term
Owning a house tends to be cheaper in the long term. However, this is not the case in the short term. Building of buying a house is capital intensive with some people taking loans to achieve this goal.
Some of these include either a construction loan or a mortgage. However, owning a house tends to become cheaper in the long term.
On the other hand, rending is always an affordable choice as you only need to pay a manageable amount as rent charges per month. However, with the rent rising consistently over time, this option becomes more expensive in the long term.
The acknowledgment is that you will never own a rental house. These are sunk costs. Compare this to an individual who takes a mortgage, at the end of the debt obligation, they retain the house.
Although there are challenges with the cost of finance for long-term loans such as a mortgage, the benefits still outdo renting.
2. Having full ownership of the house
The building or buying a house comes with full ownership rights. This allows unlimited usage of the asset without any challenges.
However, a rental house does not give you its full ownership. You can only utilize it to the extent of the contract with the owner. This is limiting in nature as the rights could be taken away at any time.
Building your own house also allows customization as per your preference. You get the right to determine some of the house elements such as location and location.
For rentals, these privileges are not available. You can only fit into what is available.
Most rentals come with a lease agreement. This contains the extent of your rights as the tenant and some could be very limiting.
As an example, the lease contract might require the tenant to rent the space for a minimum of one-year failure to which you are required to compensate the landlord for the remaining duration.
3. A source of passive income
Owning a house allows you to make passive rental income if you chose to rent it out. This happens with house owners that have multiple houses or have a big house.
With the demand for housing at its high, it is now possible for house owners to rent some rooms of the whole house to willing tenants.
Technology has also made it easier for house owners to rent their extra rooms. The process is easier and happens online through applications such as Airbnb.
4. Appreciation in value
The real estate market is among the few industries that have a near guarantee in value growth. This is due to the limited nature of some factors such as land and the increasing demand for housing.
Over the long term, owning a house is likely to grow value over time. Value growth is based on some factors such as location, security, and demand.
This outperforms renting because there is no value gain if you don’t own the house. Real estate is among the most sought-after investment currently due to this growth.
The growth in value averages 10% yearly and could go as high as 50%.
5. Stability and settlement
Owning a house brings some level of stability without the need to keep changing houses and locations. This is because there is no third party in the process and also the opportunity to build it as per your wish.
Some other benefits that come with owning a house are security and space. The challenge with renting is the owner defines the rules.
At any moment, they can get you evicted without your consent. This brings instability, it is costly and time-consuming.
6. Loan Collateral
Houses are some of the best collateral financial institutions consider to extend credit. This is due to some of its key elements such as the ability to maintain value and an easier disposal process.
This is a capability that you can’t get through renting as you don’t own the house.
Challenges of Building a House
Building a house takes time. It takes an average of 5 months to build. This is dependent on several factors such as the size of the house, weather, and availability of funds.
Without adequate funds, the process could take years. Availability of land is also another factor. Normally, house owners take time to identify an ideal location for settlement. In case of land unavailability, you have to wait.
A good settlement location has access to utilities such as water, power, internet, and a good road network. It should be safe and access to basic services such as schools and hospitals.
It requires a huge amount of resources to build a house. This is both in form of the cost of land and the construction costs.
In most instances, house owners make use of debt to assist in the process of house building. Normally, debt comes with a cost both in form of interest expense and fees such as annual renewal.
After the building process, other recurrent costs arise periodically. Some of these include maintenance fees, land rates, and insurance fees.
On the other hand, tenants don’t incur these costs as they are not building owners. They only pay the rent and leave the owner to deal with them.
3. Factors beyond your control
There are some factors beyond your control that could affect your house. Some include regulations, natural disasters, and fraud.
Regulations are government policies that could occasionally affect house ownership. Some of these regulations could result in house demolition.
For those who own their houses through debt, there is always a risk of losing them if they are unable to meet their debt obligations. This mainly occurs if you lose your source of income such as a job or business failure.
A natural disaster could also result in loss through house destruction. Some of these disasters include fire and floods. You can never predict their occurrence. However, you pursue mitigation through taking insurance on the house.
Conclusion on Why You Should Consider Building a House Instead of Renting
If you are thinking about whether to rent or build a house, there are some factors to consider.
- Budget– Building a house requires high initial capital. Therefore, if you do not have enough finances to construct a house, you can rent out an apartment as you save money for building a house.
- Mobility– The nature of your job will also determine whether it is favorable to rent or build. If your job requires you to constantly move to a different location every few months, you should rent. However, if you have a permanent job posting, building a house would be better.
- Risk– Building a house means that you will incur all the associated house costs e.g. repairs, taxes, and maintenance costs. However, as a tenant, you do not bear any risks since the landlord bears all the risks. Understand your risk tolerance level to determine whether you should rent or build a house.
To recap, we have seen that the advantages of building a house instead of renting include:
- It is cheaper in the long run
- You have full rights over the house
- A passive source of income
- Houses appreciate over time
- Stability and settlement
- Loan collateral