Renting vs Buying - The Age Old Question of Which Is Better?
It’s always been a hot debate whether it’s best to buy a home or continue to be a renter. And lately, the debate has heated up with recent articles stating that it is financially savvy to rent and stay away from the burden of owning a home.
Everyone is in different ages and stages, thus there is no one right answer for all. Let’s dig into the debate a bit and help you decide what’s best for you now and what may be best for you in the future. Let’s begin by taking a look at the Pros and Cons of both owning a home and being a tenant.
Pros of Renting
It’s hard to beat the feeling of getting the keys to your very first home, but there certainly are
some benefits of staying in a rental home. The largest benefit has got to be the lack of commitment. Sometimes signing a yearlong lease may seem like a commitment, and if it does, then you know you aren’t ready to own!
All joking aside, renting is fantastic for those times in life when things aren’t certain. Maybe you are new to your career and maybe changing jobs and/or locations in the next couple of years. Or maybe you are contemplating going back to school soon. Or perhaps you just moved to the area and are figuring out which neighborhoods you like best. Whatever the reason may be, it’s great to rent if you aren’t ready to fully commit to a location or aren’t sure what the next couple of years may hold for you.
Another positive aspect of renting is that you aren’t responsible for the maintenance and upkeep of the property. Water heater breaks? Call the landlord! It’s 104 degrees out and the AC won’t work? Call the landlord! Both the costs and the hassle are on someone else.
Lastly, renting is less expensive overall than owning a home. Generally speaking the upfront
costs (like deposits) and the monthly costs (like rent, utilities, and maintenance) are cheaper as a tenant than as a homeowner.
Cons of Renting
Many times I hear people say their biggest complaint about renting is that they can’t personalize their space. And yes, I agree that this is a Con of being a renter. However, I think what is often overlooked as downsides of renting long term are: Instability and lack of wealth-building potential.
Let’s start with instability. Remember the lack of commitment I wrote about 2 paragraphs ago? Well, on the flipside the landlord also lacks commitment to their tenants. Yes, they must abide by the lease you signed. Unfortunately for tenants, the landlord could ask you to move at the end of the agreement or raise your monthly rent.
Both of these things create instability in the renters' life. Short-term (whether that means 1 year or 10 years) this isn’t a big deal. Over the long haul though it means you have less control over what happens in your day-to-day life.
The final Con of being a renter long-term is the missed opportunity of building wealth simply by living in a home you own. We’ll be diving into this when we talk about the Pros of owning. Just know that home ownership is one of the top ways people build wealth and financial stability in their lives.
Cons of Owning
Before I get to my favorite part (homeownership!) let me explain the couple Cons of owning a home. Really, the Cons of owning are the Pros of renting! First and foremost, the commitment level of owning a home is high.
Selling a home costs money (5-7% of the sales price) takes time, and can be easier or harder depending on home buyer demand. So if you intend to sell the home within a couple of years and move, it may be too risky, too costly, or too much of a hassle to buy right now. You may want to wait.
The second Con of owning your own house is the maintenance costs and responsibility. I have seen people buy a home with the best of intentions and run it into the ground because they didn’t realize how much time and money it would take to keep their home clean, well kept, and running properly.
This isn’t a financial advice column, but it sure is less stressful if you can pay for the maintenance and upkeep without resorting to loans and credit cards. My advice, do a little research online, with friends and family, and with your trusted real estate agent about what are the typical ongoing maintenance costs.
Pros of Owning
For those who are prepared, the rewards of home ownership far outweigh the negatives!
To some, the first Pro may not be a big deal, and to others, it’s the biggest! Homeowners get to personalize their space.
You can paint things in whatever color you choose. You can update and stylize the kitchen, bathrooms, bedrooms, yard, hallway, dining room, and office...I think you get where I’m going. The home is yours and no one can tell you what it has to look like (unless you live in a Homeowners Association...but that’s a different article). Creating your own space is ultimately what makes it feel like home.
Then there are the financial rewards. Most people know you get a tax deduction for your mortgage interest. And though this is a nice side benefit, the larger financial benefit is the wealth-building aspect of owning real estate. According to the Federal Reserve’s 2019 Survey of Consumer Finances, the median homeowner has nearly 40 times the wealth of a renter (or non-homeowner). $254,900 for the homeowner versus $6,270 of a renter to be exact.
Why is this? Largely it’s because once you become a homeowner you have committed to paying toward an asset. And while you are paying down the debt owed the asset (your property) can become more valuable. The difference between the amount you owe and the amount the home is worth is the property’s equity.
The equity is part of your overall Net Worth. I don’t know about you, but I would certainly rather have my home growing my wealth versus growing someone else’s wealth. The last Pro of homeownership is the financial stability it helps to create. If you are on a fixed interest rate mortgage your monthly payment doesn’t change over the years.
This means that those whose monthly income is never going to increase (mostly people out of the workforce) don’t have to constantly worry that their monthly housing cost is going to change. Eventually, you will own the home outright and those monthly costs go WAY down making it an even more affordable housing option.
Lastly, let’s answer this question:
If owning a home is a wealth builder, why are some experts saying it’s best financially to stay a renter? The theory is that by staying a renter you avoid the maintenance costs, taxes, mortgage interest, and utility cost burdens of owning a home and instead put that extra money into the stock market.
According to this article by MillionAcres, historically the S&P 500 has outpaced residential real estate returns. And while this is great in theory, in practice most renters end up taking that extra money and putting it toward things besides the stock market. Not to mention, at the end of the day you still have to pay for housing for your entire lifetime if you do it that way, versus the potential end of mortgage payments after a set amount of time.
The Bottom Line
For financial and other reasons, most people ultimately choose to strive toward becoming a
homeowner. This doesn’t mean that choosing to be a renter is a “bad” thing. Quite the contrary, many times renting is the right thing to do for many reasons. If you are looking to buy a home our team would love to answer any questions you may have about the process.
Roger Lee & Donavan McFadden of the Marching 2 More Real Estate team are grateful to our new clients for entrusting us with their real estate endeavors. Your satisfaction and success are at the heart of everything we do.
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