Welcome to Get Smart about Investing. Let’s talk about renting versus owning a home. Everyone has heard the saying that renting is throwing money away, and that can be true, but I have also seen plenty of people throw money away making bad home purchases or purchases that were not right for their situation. It’s important to always let your situation dictate whether it’s better for you to rent or own. Let’s look at some of the drawbacks of each choice, as a comparison.
What are the drawbacks of renting?
1. If you are renting, you don’t own anything. You’re not building any equity or ownership each month. Owning serves as a form of forced savings. For someone who owns a home, part of their monthly payment is usually going towards the principal, so they are building ownership.
2. By renting, you miss out on any potential appreciation of your home over time. Ask anyone who bought a house 10 or 20 years ago what they paid and they will tell you their home increased significantly in value.
3. Rent keeps going up each year as a result of inflation, like any other items you might purchase. If you own a home and have a 30-year fixed mortgage, your housing payment should not go up that much over time. Owning growth investments like real estate protect you from the effects of inflation; but by renting, you are not protected.
4. There are no tax benefits for renting. By renting, you miss out on the tax deductions associated with owning a home, namely the deductions for mortgage interest and real estate taxes. Many people greatly over state how important the deductions are, but none-the-less, the tax treatment of owning is an advantage. You should never buy real estate or get a mortgage simply for the tax deduction, but if you are going to buy, then the deductions can help lower your costs. But again, only if buying already makes sense for you.
After covering the drawbacks of renting, it may seem like everyone should own; but let’s take a look at the other side of the story before you make up your mind.
What are the drawbacks of owning?
1. Owning a home costs a lot more than renting. To start with, there are significant transaction costs just to buy and sell, as we addressed earlier. Most people forget about all of those costs once they are in the home, but they’re there. Between the closing costs to buy and the costs for selling, you need a home to go up by more than 10 or 15 percent just to break even; and that’s before looking at the monthly expenses. The total monthly costs can be high enough to strain any budget between the mortgage, real estate taxes, homeowners insurance, and not to mention, the costs for maintenance, repair and utilities. High monthly housing costs have prevented many individuals from making financial progress in other areas, like saving for retirement or paying off credit card debt.
2. Owning a home is a lot less flexible than renting. When you’re renting, you can pick up and move whenever you want. If you are relocated for your job, want to move to another area, or simply change where you live within the same area, there are virtually no costs associated with moving from one rental to another. If you own a home and want to or have to sell it, you have to go through the costly and time-consuming sales process. I have seen many people who have bought homes and move frequently lose out financially because of all the costs associated with these transactions.
For most people, my advice is, owning your own home is financially in your best interest as long as you think you will be there for at least five years. If you are going to live somewhere for two to three years, you would be better off renting and saving money in the meantime. Really take the time to think about your location and career and family life over the next three to five years to get a better sense of what to do. Life is unpredictable. Try to really clarify what is important and what the most likely outcome will be, so you can make the best decisions possible. If you did make the wrong decision, don’t be-rate yourself. Learn from it and move on. Everyone makes mistakes!
I’m Greg McGraime and Now You Know!