Rent or own? That is the million dollar question.
Conventional wisdom is that you should own a home. For many families, it is the primary method of wealth building. You pay your mortgage every month and after 30 years, barring any re-financing, you own it outright. No more monthly housing payments!
Each month along the way, you are building wealth. It’s basically a forced savings plan.
And good news, your mortgage payment rarely goes up (except for that pesky insurance and property tax escrow payment). There’s typically a lot more predictability to mortgage payments than for the ever increasing rental market.
According to Trulia, buying a home is 23% cheaper than renting for millennials. It doesn’t hold true in Honolulu or San Jose, but everywhere else they say, it is cheaper to buy. As interest rates go up though, the savings will dwindle.
The Federal Reserve Bank published a study in 2012 and found that the median net worth for homeowners was over 34 times higher than for non-homeowners in 2010. And that’s with the real estate bust figured into the calculations!
When you are looking long-term, those are pretty good incentives to buy!
Renting is More Popular Than Ever
According to the Joint Center for Housing Studies of Harvard University, (JCHS) 37% of all households are renters. That is nearly 43 million households.
Rental rates are at the highest level since the mid-1960s.
It is not always because they can’t afford to buy a home. 18% of the growth in the past decade has been from households with income over $100,000! If you look at even higher incomes, the rental rate grew at 61%!
Cons of Home Ownership
Maybe these people are on to something.
There are some downsides to owning a home, as have been made plenty clear during the last recession.
- Limits job mobility. When you get an offer for a new job making a lot more money in another city, you may be limited by your house. Can you sell it? Rent it out? Can you afford to keep the house and pay for new living arrangements in your new city at the same time?
- Maintenance. The bane of all homeowners is the required maintenance. No landlord to call when the water tank starts leaking. It’s on you to either fix it yourself or pay someone else to fix it.
- Space Limitations. Decide to get married? Have children? You’ll likely need more space. Can you easily add on to your existing house? Or will you need to move to a larger house? Selling a home is expensive – what with the deferred maintenance and then the real estate commissions, not to mention moving in and of itself. According to the JCHS report, half of the growth in rentals is from single person households or married couples without children.
- Value Can Go Down. This happened for a lot of people when the real estate bubble popped around 2007-2008. People were left with more mortgage than their homes were worth. Just because historically, home values have gone up does not mean that it will in every case, in every market. When you account for inflation, the home values may be barely rising even if the raw numbers appear to be so. Robert J. Shiller, a Nobel Prize winning economist at Yale University, calculated home prices versus inflation, and determined that home prices have only gone up 0.37 percent annually over the past 126 years.
- Buying Ties Up Financial Resources. If you have the discipline to invest your down payment and any other savings from renting, could you do better than the appreciation on a house in your area? A house is a large non-liquid asset. If you have an opportunity to invest or startup a business or a financial emergency happens, it may be difficult to get the cash out of the house quick enough to take advantage.
Questions to Help You Decide
Here are some (financial) questions to help you decide whether you should rent or buy your home:
Do You Have Enough Money For A Down Payment? To get the best mortgage rates, you need at least a 20% down payment. Have you saved up $40-60,000? Without a large down payment or equity in the home, your mortgage lender may also require Private Mortgage Insurance (PMI) which may be difficult to get rid of later. And it’s a cost now.
Do You Have Enough Money for Repairs? I just had to replace a hot water heater without any notice. It cost me $1,800. This is after I replaced the air conditioner less than two years ago for $2,500. Can you afford a $2,000 (or more) bill without running up your credit cards (and paying all that interest)? A general rule of thumb is that you can expect to pay 1% of your home’s value per year on maintenance, repairs, and replacements.
How Long Will You Live in the Home? My rule of thumb is that if you don’t see yourself in THIS house for at least five years, don’t bother buying. It’s too expensive to pay the closing costs if you are only going to live there short-term.
How Stable is Your Job? If you have reason to believe that your company or your industry may be in danger, you probably don’t want to tie yourself to a 30 year mortgage, right? Because if something happens to the job, you still have to pay the mortgage.
Does the Math Work? Run the numbers. In some locations, the rental market is flooded with vacancies, lowering the rents. Others, the rental market is tight, meaning the landlords will charge you more on a monthly basis. On the other hand, where are interest rates right now and where are they going? Don’t forget about all the costs – taxes (both property taxes you’ll pay and your potential tax deductions), insurance, utilities, HOA or condo association fees, lawn maintenance, etc.
Of course, that JCHS report above said that the rental demand will continue to be strong, adding 4.4 million renter households by 2025. This will also have the affect of driving up rental prices. It may make the math harder to work out to the renter’s advantage. (Something to consider as you move forward on the path to your financial goals – should you consider owning rental properties?)
To help you with the math, the New York Times put together some calculators to compare buying a home versus renting a home. Try them out to give you a ballpark idea on when renting is better than buying.
Do You Have Pets? When you own, you typically can have pets in your house (although some HOA and local ordinances may limit what you can have). When you rent your home, it is at the discretion of your landlord. Often, landlords will require additional pet deposit or even pet rent. This is to offset for potential messes and additional wear and tear on the home. This will bump up your rental costs.
Can You Take On a Roommate? Whether buying or renting, it may be possible to have a roommate to help with the costs. Or even take advantage of things like Airbnb to rent to short-term renters.
Personally, I Own My Home
I bought a house instead of renting. I’m actually on my second home and the first one I kept for a rental property. My job is stable and I don’t plan on moving any time soon. I feel like I am in a market that will increase in value. I actually have gotten several inquiries about whether I would be willing to sell (including one the week after I moved into it), so I think I could sell in a relatively short time frame if the need arose. I was also able to lock in low interest rates, to keep it affordable.
Here’s what some other bloggers have had to say about it:
- Mr. Money Mustache says to take a look at renting if housing is over $300,000
- Can I Retire Yet? calculated that it costs $834 per $100,000 per month of housing to own. Better to rent if you can find lower rental rates.
- Money Crashers breaks down the pros and cons of renting and owning
- Michelle at Making Sense of Cents said forget it! I’m going to live in an RV!
What’s your take on home ownership vs renting? Comment below!