Given the rapidly changing real estate market, the question of whether to rent or buy a home in New Jersey isn’t as straightforward as you would think. In this blog we’ll talk about the pros and cons of each, as well as other important factors to consider as you make your decision.
But before we get into it… We are financial advisors in Morristown, NJ, providing financial advice for New Jersey residents as well as folks across the country. Before we get started, you may want to check out these New Jersey finance blogs we’ve written, in case they apply to you:
Should I buy a home in New Jersey or New York?
A checklist for moving to Morristown, NJ from NYC
What is the New Jersey 529 Plan and should I use it to send my kids to college?
Should you buy a New Jersey vacation home?
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Objectivity matters
Before we get started on the blog, we wanted to say a word about the importance of getting objective perspectives as you decide between buying or renting a home in New Jersey. We have noticed that many blogs on this subject are written by real estate professionals. There may be a bias there, as the realtor would perhaps be swayed towards urging you to buy a home for the highest possible price, in order to maximize commissions. That’s not to say that the guidance you are getting is flawed in every single case, but it is something to be aware of.
Whenever someone gives you their views on important decisions like this, ask yourself if the person stands to gain or lose from you deciding to pursue one particular course of action. As financial advisors, we can see the merits of both sides – either buying a home or renting one in New Jersey – and we will try our best to be objective and present both angles.
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Investing vs. renting a home: the core differences
Are the core of the question of whether it makes more sense to rent or buy a house in New Jersey is the core issue of what it means to invest in or own an asset (versus renting it).
Owning a home means you have an asset
An asset is something you own by law. If you own a home, you have legal right to it. You are listed as the owner in the house’s title papers. You are also liable for anything that happens to that home as long as you own it.
Let’s suppose that somebody were to attend a cocktail party at a property that you own, and they were to sprain their ankle. As the owner of the property, you are legally liable for that injury and if they were to choose to sue you, they could do it. That is why homeowners tend to have homeowners’ insurance as well as an umbrella policy, in some cases, to cover anything that may fall outside the scope of the policy. You are also legally liable for any of the required maintenance on the home and for any payments that are due, if you signed a mortgage to purchase the property.
On the brighter side, you are the beneficiary of any appreciation in the value of a home that you own as you are also subject to any decreases in its value. Owning a home means that the value of the home makes up a part of your total net worth. As you pay down your mortgage (if you have one), the more equity you build in your home.
Renting a home means you have a contract
If you sign a lease agreeing to rent a home, you do not own an asset. You agreed to the terms of a contract to lease or use an asset that somebody else owns.
As a renter, you are not responsible for the cost of maintaining the property. If something breaks it is the obligation of the owner to repair it, not you. You can still be held liable if someone were to injure themselves while present in a home that you rent, however you can insure against this by owning renters’ insurance and/or an umbrella policy.
There is no equity and no contribution to your net worth. Your rental payments pay for your usage of the asset, and there is no home equity accumulated over the lease term.
Goals and priorities must be clarified during decision-making process
It’s important to achieve total clarity about the goal of the property. Ask yourself questions like these.
- How long do you intend to live there? Is it short term (1-3 years), medium term (3-5 years) or for the foreseeable future?
- Do you see your living situation changing significantly, requiring you to need more or less space?
- Would this home be an investment or is it merely a place to live? Which core need do you wish to satisfy?
- Would it be worth it to take on debt of a significant amount, if it meant you could own an asset? Or is owning a home not that much of a priority to you, hence making it hard to justify the commitment?
The costs of buying a home in New Jersey can be substantial, so it’s important to understand the risks and commitments you are making.
What it costs to buy a home in New Jersey
It’s a substantial amount of money to buy a house in New Jersey, so you had better be prepared to plunk down a chunk of change. Redfin cites the median sale price of a New Jersey home to be $486,000 as of November 2023. Given that New Jersey home prices are so high, how does somebody go about a purchase that large?
If you have the savings to buy the house outright, you can execute a cash purchase.
If you aren’t sitting on a huge pile of cash (most people aren’t, by the way), you’ll need to finance the purchase using a mortgage. As we outline in our blog about getting a mortgage, the steps are typically:
- Shop around and get a ballpark estimate of what the house will cost
- Gather documentation about assets and liabilities
- Apply for a loan
- Make an offer
- Get the home inspected
- Close the loan
You’re on the hook for mortgage payments after you close the loan. But before that, you’ll pay application fees, loan origination fees, attorney fees, transfer tax, and possibly even others. There are incidental costs as well – in certain areas of New Jersey, for example, you’ll need to have flood insurance.
Bottom line on buying vs. renting in New Jersey
We’ve discussed quite a broad range of topics in this blog. Here’s a summary of the key factors to consider if you are deciding between whether to buy or rent in New Jersey.
When it makes sense to buy:
- You are looking to own an asset, can afford the high price of buying a home in New Jersey including all upfront and ongoing costs, and plan to stay in the property for at least five years.
When it makes sense to rent:
- You aren’t willing to accept the responsibility that comes with the upkeep of an asset, you can’t or do not wish to afford all the expenses that come with paying for a New Jersey home initially and indefinitely, and/or you aren’t sure about staying in one home for a period of at least five years.
Either way you need a financial plan
With New Jersey home prices being so high, buying a home in the state is a serious matter. If not planned for appropriately, the financial consequences include bankruptcy and possible destruction of your credit.
New Jersey homebuyers, and even those who rent, should create a financial plan that maps out the short and long-term expenses you’ll bear, as well as the cash flow you expect over that time period. Such planning is necessary to help you not just achieve your goal of affording a home, but also to make sure you can achieve other goals such as putting kids through college or retiring.
We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about buying or renting in New Jersey, retiring in New Jersey, moving there, affording to live there, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.
Sources
Redfin. New Jersey Real Estate. Accessed on December 26th, 2023. https://www.redfin.com/state/New-Jersey/housing-market