Whether to rent or to buy is a major decision. It doesn’t just affect how much money you have left at the end of the month, it also affects your lifestyle and the size of the savings you accumulate over the years. Every day, people buy homes when financially they’d be better off renting because it’s important to them to have a place to put down roots and because they see owning a property is an investment that can grow. Similarly, people rent all the time for the flexibility and minimal responsibility it offers.
Owning isn’t universally better than renting, nor is renting always simpler than owning. Consider the pros and cons of each to figure out whether renting or owning is best for you.
Renting means you can move without penalty each time your lease ends or before if you give a notice for the owner, but it also means you could have to move suddenly if your landlord decides to sell the property.
The biggest myth about renting is that you’re “throwing away money” every month. Not so. First of all, you need a place to live, and that always costs money, in one way or another. Second, while it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house.
When you rent, you know exactly how much you’re going to spend on housing each month. When you own, you might pay nothing more than your mortgage and regular bills one month, and an additional $12,000 on a new roof the next.
As a renter, though, you do face unpredictable rent increases each time your lease is up for renewal. While if you get a fixed-rate mortgage, your monthly house payments will never increase (though property taxes and insurance premiums probably will).
While home ownership is often touted as a way to build wealth, your home can lose value. The acceptable neighborhood you moved in could decline. You might buy a house for $200,000 tomorrow and in 30 years find that it’s still worth $200,000, meaning you’ve lost money after inflation.
Do you like having your evenings and weekends to use as you please? Do you work long hours or travel frequently? If so, then the time commitment that comes with home ownership might be more than you want to take on. There are always projects around a house that you will need or want to take care of.
If you rent, your landlord will take care of all the major repairs and maintenance, though of course they may not be done as quickly or as well as you would like.
Home ownership brings intangible benefits such as a sense of stability, belonging to a community, and pride of ownership. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down. Even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.
The overall cost of home ownership tends to be higher than the overall cost of renting, even if the monthly mortgage payment is similar to (or lower than) the monthly cost to rent.
Here are some expenses you’ll be spending money on as a homeowner that you don’t have to pay as a renter:
- Property taxes
- Water and sewer service
- Major property and common areas Repairs and maintenance
- Homeowners insurance
Perhaps the biggest throw-away expense is mortgage interest, which can make up nearly all of your monthly payments in the early years of a long-term mortgage. Take this typical scenario: You borrow $100,000 at 4% for 30 years. Your first monthly payment will be $477.42, of which $333.33 is interest, and $144.08 is principle. It will be about 13 years before more of your monthly payment goes toward principal than toward interest, and in total, you’ll lose $71,869.51 in interest.
Even renovation projects don’t often increase the value of your home by more than what you spend on them.
Once you add up all these costs, you might find that you’re better off renting and investing the money you would have put into a home into a retirement account.
Which option is best for you isn’t just about money, it’s also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, that renting is throwing away money or that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. Housing markets and life circumstances are too varied to make blanket statements like these.
Still, despite the added expense and extra chores associated with owning a home, many people chose it over renting. It provides a more permanent place to raise children and often it offers the only way to have, or create, the sort of residence people want. Ultimately, the decision to rent or to own is not just financial, it’s also emotional.
Chady Melhem | Property Consultant
Call me for any advice you may need!