Forex Articles

There's long been an allure to home ownership in the United States. Somewhere along the line, having your name on a deed became part of the American Dream.

In a lot of cases, buying real estate can make financial sense, too. Most homeowners can not only deduct their mortgage interest and property taxes, but they can also build equity as they pay off their loan. This can make carrying costs cheaper than paying rent.

In the aftermath of the housing crisis, owning seemed to make more sense than ever. Buyers could suddenly find properties at rock-bottom prices and take out loans with exceedingly low interest rates.

But that rationale may not extend to every segment of the market. Those who are looking at more expensive homes, for instance, are often finding that a rental property ends up being a better overall deal.

Property taxes. In bigger cities like New York and San Francisco, renters don't have to pay exorbitant property taxes, which helps shift the scale in favor of leasing.

The fact that there's a glut of luxury rentals in these markets means that landlords aren't always able to pass those costs on to the tenant. A lot of companies built homes on spec – that is, before they secured a buyer – prior to the housing downturn. While demand has certainly picked up since then, some have had to turn those houses into rentals in order to help recoup their costs.

At the same time, some U.S. cities have seen an increase in the number of foreign investors buying expensive properties and renting them out. That's helped to make leasing more affordable at the upper end of the market. Rental prices for luxury units in Manhattan, for example, are about 5.5% lower this year than last, according to Douglas Elliman Real Estate. (See Manhattan Luxury Condos as Investments for more on this topic.)

Mortgage interest. In addition to comparing home prices versus rental costs, another factor to consider when looking at multi-million dollar homes is the tax treatment. Most homebuyers can deduct the full amount of their mortgage interest payments from their income taxes. But that's not necessarily the case with pricier homes.

Currently, the limit on mortgage interest deductions is $1 million for the primary loan and $100,000 for a second mortgage if two people jointly own the property. That means if you take out a $3 million mortgage, you can't deduct the full amount of your interest payments.

There are other reasons why renting a high-end home may make sense. For one, tenants don't have to worry about maintenance costs, which can be substantial on a larger home. And for another, leasing provides greater flexibility if you're not certain where you'll be living in a couple of years.

In most parts of the country, buying is still more advantageous than renting for low- and moderately-priced homes. That's in large part because, nationwide, home prices still haven't returned to their 2007 peak. When you throw historically low interest rates into the mix, owning tends to make sense for those who can afford it. (For a look at the pros and cons, check out How to Compare the Costs of Renting with Homeownership and To Rent or Buy? The Financial Issues.)

But that's not true in every single market, even at lower price points. Leasing is still the better bet in cities like Dallas, Denver, Houston and San Francisco for homes at all levels, according to a rent-versus-buy index developed by faculty members at Florida Atlantic and Florida International Universities. In these places, the potential gain from renting at a lower price and investing the money you don't sink into housing in stocks and bonds exceeds the advantage of buying a home and developing equity.

There are drawbacks, of course. The biggest is that you won't be able to build equity to tap for future financial needs. If you were lucky enough to buy low in a market that has since recovered from a bad downturn, you could have grown your equity significantly.

And in some cases you won't have as much freedom to personalize your space with the paint colors or landscaping of your choice.

There's a tendency to think that if you're looking for a high-end property, your only choice is to buy. However, if the metropolitan area where you want to live currently has an oversupply of luxury properties for rent, it's worth considering this option and comparing it to the costs of buying. In some cities, it might even make sense to rent rather than purchase a mid-priced home.

You may also be interested in Renting vs. Owning a Home: Pros and Cons.