There are many benefits to home ownership, but its supremacy over leasing isn't nearly as clear-cut as some would have you believe.
It’s a question as old as real estate itself: Should you rent or buy? You need a place to live, and those are generally the two options. So which option is better? That’s what you’re reading this article to find out!
Of course, there isn’t just one answer that would fit every situation, or else you probably would have learned that answer before coming to this article. However, some people lean far more towards one option than the other.
In fact, you may have heard people say that renting a home or apartment is “throwing your money away.” But is it actually? And why would they say something like that?
Let’s find out!
Homeownership means home equity.
On a basic level, you likely already know the difference between renting and buying something. Typically, if you’re purchasing an item, you’ll own that item after you pay money for it. If you’re renting it, then you get to use it for as long as you’re willing to regularly pay for the use.
When it comes to a home or apartment, few people will be buying a property with one big lump sum of cash. It’s far more likely that a buyer will take out a mortgage, which is a loan used to pay for a house. The loan is paid down monthly and accrues interest while the home acts as collateral, meaning it will be seized by the bank if the owner can’t make their payments.
“When buying a home you can take advantage of tax breaks such as deductions on interest rates and deductions on annual real estate taxes paid based on the assessed value of your property,” explained the experts at Redfin. “Homeowners pay monthly mortgage payments, gradually reducing the principal mortgage amount over time while the property keeps on increasing value, and you as a homeowner can build equity and increase your stake of ownership in the property with every payment.
“And if you decide to sell your house you will get enough money to pay off the loan, and earn a little extra that you can use to purchase another house. In contrast, renters still make a monthly payment, but these funds do nothing to contribute to the renter’s long-term wealth.”
Because renters do not build equity, many people will claim that renting is “throwing money away.”
But there are benefits to renting, too.
Of course, renting is not literally the same as throwing your money away. If spending money on something you will not own forever is throwing it away, then why have we been burning cash on all of this worthless food every day?
In fact, not only can renting be the more sensible choice in many situations but owning tends to have its own forms of “throwing money away.”
“Many people think renting is ‘throwing your money away’ but every person’s situation is different,” advised Ivan Chong, founder of Lazy Finances. “If you plan on moving every few years, renting might make sense over buying. Every time you buy/sell a house, you get hit with closing fees which are a significant amount of money. Mortgage interest, property tax, and homeowner’s insurance are all ‘unrecoverable expenses’ similar to rent, though you can deduct some of them off of your taxes. These effects are amplified in high cost of living areas.”
Even if you are certain you want to own a home, that doesn’t always mean the present is the best time to buy one. If the time is not right to buy a home, then renting will actually save you money in the long term, not waste it.
“The housing market fluctuates. If you need to sell it is possible that the market may be flat, and you can lose out on your investment,” explained Jared Weitz, CEO and Founder of United Capital Source Inc. “Fight this off by following the general rule of looking to buy a home when the interest rates are low, and the market is heading down. There are many hidden costs of home ownership, and renting shouldn’t always be looked at as ‘throwing money away.’
“If you plan to spend less than three years in a home and have minimal money saved for a down deposit—look at renting. Unless you have 20% of a home cost available for a down payment, you will need to also factor in mortgage insurance payments.
“Additionally, if you look to buy in a condominium or housing community, HOA and maintenance fees will be included in your monthly payment. This adds additional cost to home ownership, making renting more appetizing while you save up.”
Figure out what makes sense for you.
One of the worst real estate choices you can make is one that you feel pressured into, against your better interests, because of generalizations you’ve been told.
“The biggest mistake I see people make is buying a ‘starter home’ simply because they’re ‘sick of throwing away money’ or they feel pressure to take the next step into adulthood,” warned Stephen Caplan, financial advisor at Neponset Valley Financial Partners. “All sorts of evidence suggests that many young people end up regretting their home purchase because they didn’t know exactly what they were getting themselves into.
“The longer you live in a home, the more likely you are to reap the benefits of homeownership. On the flip side, your home purchase can turn into a disaster if your time horizon is too short.”
Want to hear about someone’s personal experience navigating these choices? Here you go!
“For myself and my husband, we chose to rent for the first 4.5 years of our marriage,” recounted Amanda Kintz, of Crunchy Hippie Life and author of Dirt Cheap Adult: A Millennial’s Guide to Life on a Budget. “Renting allowed us options to move almost painlessly to different opportunities as they became available, rather than waiting and stressing about having to sell a house.
“It also significantly lessened the burden on us as a newly married couple building up their bank account since we didn’t have to find things like emergency repairs or home improvements.
“While we do own a home now, we are very thankful for the time we spent renting as it allowed us the freedom to save money and explore job opportunities (including moving to three different states!). I know we would not have been able to do that if we had been homeowners.”
Older homeowners might be better off renting.
It’s always a good idea to examine the specifics of each situation, rather than trying to adhere to general rules. For example, you might think an older person who is not planning to move would be the ideal candidate for home ownership, assuming they can afford it. But that’s not always the case.
“As it relates to older clients I will often recommend renting instead of buying especially for second or vacation homes,” explained T. Eric Reich of Reich Asset Management. “Even renting a primary residence can be smart for older clients. My argument for renting is that while you may be physically able to maintain the home today, will you still be able to in 10-15 years?
“For a 65-year-old, many can’t answer that question confidently. The downside, of course, is that the rental could be sold and you could have to move at an age when you are least inclined to do that so it depends on the rental.
“Personally, I’m not going to be climbing ladders or mowing lawns at age 80+ and hiring someone to do that work only adds to the cost of ownership. I’d rather see that money in their pocket working for them instead.
“As to the concern of leaving your house to your kids, I understand that most everyone wants to do that for their heirs yet almost no heirs actually want it, or if they do, they can’t afford it or afford to buy the other heirs out of it. What heirs really want is cash, not the house and all the issues that come with disposing of it.”
Figuring out the best choice for you may not be as snappy a slogan as “renting is throwing your money away.” It does, however, have the benefit of being true more often.
After spending nearly four years in New York City as an investment consultant, Stephen Caplan moved back home to the Boston area in August 2016 to join Neponset Valley Financial Partners as a wealth manager. Upon his return, it soon became obvious to Stephen that one particular issue was affecting the financial lives of fellow millennials much more than anything else: student debt. Stephen has since become an expert on student loan repayment planning and recently earned the Certified Student Loan Professional (CSLP™) designation. His practice focuses on helping young professionals integrate personalized student loan repayment strategies into long-term financial plans.
Amanda Kintz (@MsCrunchyHippie) is a Registered Nurse. After living on an income of just $16,000 with her husband in 2014, Amanda discovered a passion for educating and empowering people to live a lifestyle of wellness in both body and finances. Her creative ideas for living a healthy and financially free life can be found on her blog, CrunchyHippieLife.com, and her new book, Dirt Cheap Adult: A Millennial’s Guide to Life on a Budget, now available on Amazon and Barnes and Noble.com.
Eric Reich is President and founder of Reich Asset Management, LLC. He relies on his more than 20 years of experience to help clients have an enjoyable retirement. Using his Enjoyable Retirement Solution, Eric helps retirees maximize retirement income while preserving their principal. He believes that, for many retirees, preserving principal is more important than trying to beat the market. Eric is a graduate of the Richard Stockton College where he earned a Bachelor of Arts in Business Management. He has since become a Certified Financial PlannerTM professional, obtained his Certified Investment Management AnalystSM (CIMA®) and earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.
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