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Homeownership has been a cornerstone of the American Dream for decades and is something many men look forward to as a sort of rite-of-passage into adulthood. But is buying a home the right choice for you? Are there instances where you’re actually better off renting?
Kate and I asked ourselves these questions last year as we made the decision to transition from renting to homeownership. Below we highlight some of pros and cons we considered when making our choice. Hopefully it will come in handy for those of you who are starting to contemplate whether or not homeownership is the right choice for you.
Pros and Cons of Renting
Flexibility and mobility. If you’re a young, life-designing, jet-setter who loves to change locations like you change your underwear, a rental lease gives you the flexibility to easily move whenever you want. Most leases last for a year, and you can often negotiate for a shorter one if that’s something you need. All you have to do at the end of the lease is move your crap out, make sure everything looks clean, maybe replace some light bulbs, and turn in the keys to the landlord. Renting allows you to be a lot more footloose and fancy free.
More savings than buying (in the short-term). If you look at buying vs renting from a purely financial perspective, renting usually offers more savings than buying in the short term. Unlike buying a home, renting has very few upfront costs and no selling costs. It usually takes a homeowner five or more years of regular mortgage payments before homeownership starts offering any kind of savings. So if you plan on only staying in a location for five years, you’ll probably save more money by renting.
To see the savings advantage of renting in the short-term (and buying in the long-term), take a look at The New York Times’ awesome Buy or Rent Calculator. You can change different variables depending on your unique circumstances to see when renting might be better than buying.
Reduced monthly costs. When you rent, your monthly costs are usually just your rent, utilities, and renter’s insurance. Compared to an average single-family home, utility costs in an apartment are usually significantly lower, as is the cost of renter’s insurance compared to homeowner’s insurance. If you’re lucky, you can even get your utilities costs rolled into your rent at a reduced rate. You also don’t have to pay property taxes or association dues when you rent. Well, you don’t have to pay them directly. Landlords usually roll taxes and association fees into your monthly rent, but if you live in a large apartment complex, the cost of property taxes is shared with hundreds of other tenants, thus reducing the amount your landlord has to bilk you in rent.
No money or time costs on maintenance. When you rent and something goes wrong with your place, you just have to pick up the phone and call the landlord to take care of it. If you’re renting at an apartment complex, there’s no lawn to mow, weeds to pull, or walkways to shovel. You can spend more time doing stuff that you want to do instead spending your weekends puttering around the house.
Perks. Many apartment complexes offer some nice amenities and perks that you probably wouldn’t get if you owned a home. Our old apartment had a pool that made the oppressive Oklahoma summers somewhat bearable. They also had mountain bikes we could check out and ride on the nearby trails along the Arkansas River. Oh, and they had fresh cookies in the front office every day. That was awesome.
No control over property. So you want to hang up that framed “Dogs Playing Poker” painting in your apartment? Might want to run that by your landlord first. Some don’t like tenants putting holes in the wall. You want to put a grill on your patio? Better ask the landlord first. Might be a fire hazard. Your wife’s pregnant? Congratulations! Unfortunately your landlord doesn’t allow children on their property (keeps things pleasant for the other residents). Better start looking for a new place. When you don’t own the property, you give up some freedom to do what you want with your place.
No equity. Rent is a sunk cost. You’ll never see that money again. Again, in the short-term, that might not be a big deal (see above), but still, it’s a sunk cost.
Annual rent increase outpacing inflation. Whenever your lease runs-up, your landlord is free to increase the rent on the property. And they usually do. Before the housing bust, the increase usually matched the inflation rate.
However, in the aftermath of the U.S. housing bust, rent increases have been outpacing the inflation rate because of the significant rental demand. In 2010, rents went up by an average of 4.2% (inflation in 2010 was 3%). In some high-demand cities like Washington D.C, rent increased by 7%. Analysts expect rental rates to rise at about 4.6% this year and continue to rise by about 4% for the next two years.
When you have a fixed-rate mortgage, your monthly payment stays the same year in and year out.
Few tax benefits. You can’t write off your rental payments like you can with mortgage interest. If you run a business out of your apartment or rental home, you might be able to get a home office deduction. That’s about it.
Listening to your neighbors chaka-chaka-ing. If you’re renting in a large apartment complex, your privacy is sort of limited. The walls at these places are often pretty thin. Hearing your neighbors yelling at each other or creating the “beast with two backs” all night long can get pretty tiring. And of course you have to be mindful of not bothering them. That means no jumping around like a crazy man while doing P90X if you live on the second floor. And if you have kiddos, constantly reminding them to not do stuff kids naturally do like skip and shriek because it will bother the neighbors can get pretty old, pretty fast.
Pros and Cons of Buying
Emotional satisfaction. In national surveys among homeowners on why they bought a home, emotional factors are always the top reasons. Homeownership is wrapped up in so many emotional layers. For many people owning a home makes them feel secure; for others, homeownership provides a sense of independence, pride, and fulfillment.
Stability–financial and otherwise. Unlike rent, which tends to increase every year, your mortgage payment will remain the same for most of the life of your loan (assuming you have a fixed-rate mortgage). Owning can also provide some emotional stability. When I lived in apartments, I always felt sort of shiftless and in limbo. Now that I have a home, I’m starting to feel a bit more rooted. And I’m at a stage in life where I like that feeling.
Build equity. Unlike with rent, when you make your monthly mortgage payments, you actually have a chance of seeing your money again. That’s because with every payment, you’re building equity in your home.
More savings than renting (in the long-term). Check out The New York Times Buy or Rent Calculator, and you’ll see that as you stay in a home longer, the savings benefits far exceed that of renting.
Tax benefits (maybe). You’ve probably heard people go on and on about how the biggest benefit of buying over renting is the tax benefits. While it’s certainly true that the feds allow you to subtract what you pay in interest on your mortgage as well as what you pay in property taxes from your taxable income each year, there is a possibility that owning a home will provide you with little or no tax benefits.
To get the tax advantage from buying a home, the amount you pay in interest and property taxes (as well as any other deductions) needs to be more than the standard deduction (In 2011, the standard deduction for single filers is $5,800; for married filing jointly it’s $11,600). If you buy a low-cost home, there’s a good chance that what you pay in interest and property taxes won’t be more than the standard deduction.
So while there are tax benefits of owning a home, don’t assume they’ll be that great or that you’ll even get them.
More space and layout options. Most apartments run in the 1-2 bedroom range, and are laid out in a very economical way. That’s fine for when you’re single or a couple, but once you have kid, it’s amazing how a place that once seemed decently roomy now feels like a confining hole. A house (and the backyard that typically accompanies it) gives the kiddos room to roam and parents space to breathe.
Control over your property. If you want to paint the walls green or turn your garage into a barber shop, go right ahead. Feel like punching a hole in the wall? While certainly stupid, that’s your prerogative. You own the place.
High upfront costs. The high upfront costs of owning a home is one of the biggest factors keeping younger people from becoming homeowners. Already laden with mounds of student debt, many young Americans are having a hard time gathering the scratch they need to even be considered for a mortgage.
In the wake of the sub-prime mortgage crisis, lenders have gotten very strict about who they loan money to. Expect to make a 20% downpayment on your home. That means for a $135,000 home (price I’ve seen thrown around for homes in new housing developments here in Oklahoma), your downpayment would be $27,000.
But your upfront costs don’t stop at your downpayment. You’ll also have to pay closing costs. I was blown away by the number of fees we had to pay when we closed on our house: loan application fee, title insurance, appraisal fees, home inspection fees, document preparation fees, and state recording fees. Of course, you can reduce the amount you pay upfront by negotiating with the seller to cover some of the closing costs.
Not very flexible. If you’re going to buy a home, make sure you’re going to live in it for at least five years. Unlike a lease that you can get out of after a year, when you own a home, you’re responsible for taking care of it and making payments on the mortgage until you sell it to somebody else. And selling a home can be a booger. Homes can be on the market for months or even up to a year or more before they’re sold. When you’re trying to re-locate, a hard-to-sell home can quickly become an albatross around your neck.
Extra costs. Maintaining a home can be more expensive than renting an apartment. For example, our utility bills have gone up because we’re now paying for natural gas for heating and cooking and for garbage service–something we didn’t have to do when we had an apartment. Our water bill has gone up as well because we now have a yard and garden to water.
On top of that, there’s all the yard maintenance and repair costs that we weren’t responsible for when we had an apartment, which brings me to my next point…
You’re responsible for maintenance. Since becoming a homeowner, my honey-do list has gotten longer. Way longer. I’ve got a backlog of things I need to do around the house, and things get added to it every other day. Yeah, there’s a part of me that’s like, “Great! Excuses to go buy new tools and learn new DIY skills!” But there’s another part of me that’s like, “Man, what I wouldn’t give to have my weekends back.” Don’t underestimate the time and money costs of maintaining a home. They can be substantial.
Any other pros and cons for buying vs. renting? If you’ve been on both sides of the fence, what’s been your experience? Share your advice with us in the comments.