One of the common themes that get kicked around the financial blogosphere is the debate between buying and renting a place to live. Recently, there has been a rash of posts depicting the horrors of home ownership, warning others to avoid it like the plague. But, is this seasoned advice from people who understand the housing market? Or, is it bitter criticism from people who made an untimely investment? The truth is probably a little of both.
This is the first in a series of four posts on real estate.
Disclaimer: I’m not a licensed broker or a real estate professional and laws change and vary by state. Before making any decision about buying a house, you should be aware of the laws or consult with a licensed professional.
How you Live is a Personal Choice
The decision to rent or buy is often based on personal reasons that favor one approach over the other. I never make blanket recommendations that people should rent or buy, because everyone’s situation is different. In life, most important decisions are made with the heart, not the wallet.
I’m a middle-aged guy, with a family and a stable career. I love where I live and have no intention of moving. So, buying a house was an easy choice for me. My brother owns a house down the street and the rest of our family lives within a short drive. My wife has pets, chickens, tropical plants and a vegetable garden. I have motorcycles, trailers, a truck and I want a motor home. We love our property and could never go back to renting.
On the other hand, I have friends who are happy renters. One is single and he often relocates for work. He is close to retirement age and most of his money is tied up in retirement accounts. It would be foolish to raise his cost of living and undertake a mortgage at this point in his life. Others I know have recently lost their houses and they no longer want the crushing pressure of debt.
Common Myths & Misconceptions
“I save a lot of money by renting.”
Unfortunately, it’s not that simple. The cost of a fixed mortgage stays the same, while the cost of rent continuously goes up. When I bought my house 15 years ago, my neighbors thought we were nuts to pay $500 more per month to buy, instead of renting. Now, they pay more to rent their apartment than the mortgage payment on our house. After our house is paid off, they will be paying a lot more than us. We are headed into an inflationary environment, which heavily favors owners over renters.
“When you rent, you are throwing money away.”
Shelter is a commodity, just like copper, oil or soybeans. Whether you rent or buy, you have to pay for shelter. For some people, it’s much more practical and efficient to rent. For others, buying is the only way to go. I don’t regret all of the money I paid out for the 13 years I rented. I was young and lived right on the beach. I wasn’t ready for the responsibility of a mortgage. My income wasn’t high enough to afford a house. So, I saved up money for when the time was right to buy. And, I never looked back with remorse.
“You should buy a house for the tax deduction”.
The mortgage interest deduction is a terrible reason to buy a house. In my opinion, it’s more of a scam than a benefit. This tax break is widely publicized by the mortgage and real estate industries. But, unless you pay a lot of interest, it doesn’t add up. The standard deduction is so high now it’s harder to itemize taxes. Even if someone can write off part of the interest, it’s like giving the bank a dollar to get a dime back in taxes.
Disclaimer: I’m not a tax professional and the tax laws change and vary by state. Before making any financial decision for tax purposes, you should consult with a licensed tax professional.
Who is a Candidate to Buy or Rent?
There are dozens of complex issues surrounding the decision to rent or buy. But, the decision can be simplified by using a few basic criteria that make the choice seem obvious. Which of these conditions apply to you?
Better Off Renting
- Have limited or sporadic income or employment
- Desire the freedom to move, travel or relocate
- Don’t want the expense or hassle of maintenance
- Don’t have many pets or need a lot of storage space
- Don’t have or want to invest a down payment
- Want to live in an area where you can’t afford to own
- Plan to live in one place for many years
- Have a stable income and predictable expenses
- Have money put aside for a down payment
- Want the freedom to customize their surroundings
- Can absorb the cost of taxes and maintenance
- Want more control over their lifestyle decisions
Looking into the Future
In the short-term, renting has a lot of financial advantages over buying.
- Lower initial cost per month
- No down-payment required
- No property taxes or maintenance costs
- It’s cheaper to move, without selling a house
- Never owe more than a house is worth
In the long-term, the financial advantages shift toward ownership.
- The payment on a fixed mortgage never goes up
- It’s very cheap to live, after the mortgages is paid off
- Housing values usually rise with wages and inflation
- Owners can sell or downsize with tax advantages
- A property can be rented or mortgaged for income
- Owners can retire with predictable housing costs
The Bottom Line
The bottom line is that life is a series of trade-offs. Renting and owning both have their fair share. The decision to rent or buy has a lot more to do with a person’s goals and desires than with the math involved.
“The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was.”
Mort Zuckerman – Real Estate Billionaire