Renting or buying a property in Luxembourg?

Deciding between renting and buying a property? Maybe you're ready to move out of your rental and into your own property. Or maybe you're moving to a new city and are considering renting a property before making the leap to homeownership. Whatever your reasons, take a moment to consider how renting or buying real estate will affect your life now and in the future.

Should you rent or buy real estate? 3 questions to ask:

Each of us has a unique lifestyle, financial situation and long-term life goals that influence our decision to rent or buy real estate. To sort it out for yourself, ask yourself three main questions.

1) Is renting or buying right for you?

One of the most important questions to consider when deciding whether to rent or buy a property is your timeline. For example, if you've just moved to a new city, are planning a job change soon, or don't plan on staying in the community for long, it may make more sense to rent. Selling real estate costs money, and if you sell too soon after purchase, it may not be worth it.

On the other hand, if you have found a community where you want to put down roots, buying may be the best option. Owning property offers more stability and perhaps more financial benefits to buyers who plan to live in an area for more than a few years.

2) What is your financial capacity?

Buying and renting each have their own costs to consider - and that can make the difference between becoming a renter or owner. To buy, you'll need enough money in the bank to make a down payment and pay closing costs. The amount of these fees depends on your home loan, your lender, the housing market and other factors. Many buyers make a down payment of only 3%, although a larger down payment usually saves you money on interest and mortgage insurance.

There are also ongoing costs associated with owning a property - mortgage payments, maintenance, utilities and various types of home insurance. Learn more about the costs of buying real estate or use a mortgage calculator to get an idea of what you can afford.

If buying a property is draining your savings or putting a strain on your monthly budget, it may make sense to continue renting for the time being. To rent, all you usually have to do is fill out a rental application, pay the application fee, put down a security deposit and pay the first and last month's rent. Deciding to rent can also give you time to improve your credit rating, which can save you money in mortgage interest and other loan costs.

Keep in mind that your monthly rent payment is likely to increase each time your lease comes up for renewal. Depending on the housing market, you could end up paying more for rent than you would for a mortgage payment. A rent or buy calculator can help you assess what's best for your situation, but keep in mind that this is only a rough estimate.

3) Will renting or buying a property fit your lifestyle?

Renting or buying real estate is also a matter of lifestyle. Owning a home is a long-term investment that can help you build wealth over time. This means treating your property as an investment and caring for it accordingly, with regular maintenance and repairs. Buying also comes with pride of ownership and the freedom to make decisions about style and improvements that you typically don't have as a renter. In fact, in some markets, buying a property with a garden, a garage or that third bedroom you've been dreaming of may be more affordable than renting an equivalent property.

On the other hand, you may have good lifestyle reasons for continuing to rent rather than buy a property. Renting might be preferable if you would rather not have the responsibility of maintaining the property and the likelihood of having to pay for emergency repairs. Perhaps a change is on the horizon, such as a career transition or a child attending a different school, where renting real estate makes more financial sense and better fits your long-term goals. Renting can also be a good choice if you have an active lifestyle, move frequently or simply prefer more freedom and are not ready to make a large commitment.

Renting or buying: advantages and disadvantages

When deciding whether to rent or buy a property, consider the pros and cons of each option.

Advantages of renting a property

Property repairs: If something breaks in a property you rent, it is usually the landlord's responsibility to fix it, not yours. So when the air conditioner stops working in the middle of summer, you don't have to spend thousands of dollars to fix it.
Monthly housing costs: In most cases, when you rent a property, your monthly housing costs stay the same, except for minor fluctuations in utility costs. Your base rent doesn't change and you probably won't need to budget for emergency repairs, maintenance costs or property taxes.
Flexibility: You can move at the end of your lease or relocate to another city without having to worry about selling your property. Renting a property also allows you to see what styles of property you like, what floor plans you don't like, and if a neighborhood is right for you, before you buy a property.
Investment Opportunities: Renting can free up some of your income, since you won't be spending it on repairs or improvements. You may have additional funds, also known as disposable income, to invest in developing your finances rather than investing in real estate. You may even be able to save money for a down payment.

Disadvantages of Renting Real Estate

Temporary: The biggest advantage of renting is also the biggest disadvantage. If you plan to put down roots in a community, renting may not be the best option, as most leases only last a year or two.
Uncertainty: You don't know when the property owner will decide that they no longer want the responsibility of being a landlord. When your rent comes due, they may decide to sell, which means you will have to move out. Similarly, when your lease expires, your apartment may not offer you the opportunity to renew your lease.
Possible rent increases: When you are a tenant, each year you renew your lease, your rent may increase. Depending on whether or not you negotiate the rent, the new cost may be out of your budget. In this case, you will probably have to find a new rental.
No home equity: As a renter, you build no equity - that is, the percentage of the property's value that you paid for, rather than what your lender still owns. When you pay your rent each month, you are helping someone else build equity, when you could be using those funds to improve your own finances.
As-is property: You generally do not have the ability to modify a rental property to suit your needs. Some landlords may allow you to make small changes, such as painting the walls of your living space, but you'll probably have to repaint them in the original color when you move in.

The benefits of buying real estate

Build equity: As a homeowner, you will have the opportunity to build equity and potentially increase the value of your property. The longer you own your property, the more equity you have and the more money you are likely to make when you sell it. Equity can also allow you to borrow money for major expenses and build wealth that will benefit you later in life.
Customizable: Buying a property means it's yours - you can paint it, remodel it and personalize the space to your liking without having to follow the rules of a landlord. This pride of ownership is a big plus for those looking to move in.
Stability: You won't be at the mercy of a landlord who may decide to sell the property once your lease is up. You have the freedom to decide how long you want to stay in the property, and ultimately if and when you want to sell.
Tax Benefits: Some homeowners may receive tax benefits, which are reductions in your federal or state taxes. Many first-time buyers can take tax deductions, such as on their mortgage interest, which can save you money at tax time.

Disadvantages of buying a property

Closing costs: During the real estate buying process, you must also consider typical closing costs and other upfront costs and expenses - inspection, title insurance, lender fees - which often total 2-5% of the purchase price of the property. However, there are many down payment assistance programs that can help you cover some closing costs.
Property Value: Ideally, the value of your property will increase between the time you buy and the time you sell, but this is not always the case. Events beyond your control, such as a change in the economy, can potentially reduce the value of your property. Then there's the money you spent on improving the property and other fees you paid as a homeowner, such as HOA dues, homeowners insurance, etc. The longer you stay in your property, the more time you have to spread out these additional costs and increase your return on investment.
Property Maintenance Costs: With ownership of a property comes the responsibility of maintaining it. If there is a leak in the roof, it is your responsibility to take care of the repairs and pay for them. You will also need to be prepared for emergency repairs, such as a burst pipe or broken furnace.
Investment Limits: When you buy, you may be putting most of your money into one investment - the property. This means you may not have additional money to invest in stocks or other investments. That said, any improvements you make to your property could turn into an attractive long-term investment when you sell.
Property Taxes: Another important cost to consider as a homeowner is property taxes. Depending on the area in which you are purchasing a property, property taxes can be a significant cost to consider. If you rent an apartment, you will not pay property taxes. If you are renting a property, your landlord will likely factor property taxes into your monthly rent payment.

Things to remember: renting or buying a property

Whether you decide to rent or buy a property, it's a personal decision that involves looking at different aspects of your life. From your financial situation, to your lifestyle, to your employment situation and long-term goals, there are many factors that can determine whether you should rent or buy a property. If you're still unsure which option is best for you, talk to a mortgage lender or real estate agent who can give you professional advice.