Home ownership is synonymous with the Great American Dream, right? As such, it’s an idea that’s packed with emotion and stoked with ambition. When you’re younger, you’re advised to save your money — just so you can buy a home. Home ownership is the equivalent of the Holy Grail in matters of personal finance.
But is home ownership the best move for everyone? I don’t think so. While it’s evident economic times have changed, and the ride of home ownership has been like a rollercoaster over the past decade, I have long held the unorthodox opinion that home ownership is NOT right for everyone.
In previous generations, conventional wisdom was to save up money for a down payment to buy your first home. “Buy as much house as you can afford,” went the mantra. Build your equity while you build your income over time, and then upgrade your home to the most house you can afford. History had demonstrated owning a home was a fabulous investment, since the value of real estate always went up. Of course, 2008 taught us that this isn’t always true.
The question of owning or renting a home is complex and requires a multifaceted decision. Here are questions and considerations to determine what’s right for you.
Will You Stay Put?
How likely is it that you will be in the same house, or even the same town, in three to five years? In our modern world, people are mobile as they pursue their careers, and technology allows many of us to work from anywhere. Depending on the real estate market where you live, it might be unwise to purchase a home that you need to turn around and sell in a short window of time.
On the other hand, if you live in a very active real estate market, buying might be the right idea for you, even if you are likely to move away in a couple of years.
If you are just starting a career that has the potential to take you other places geographically, renting and socking away savings for a future home purchase would be wiser than buying a home now.
What Will Your Family Look Like?
Are you currently in a relationship? Do you want children in the next few years? While it’s unreasonable to completely map out your life with absolutes (wouldn’t that be lovely!), it’s wise to think ahead before committing to a large purchase such as home ownership.
Are you in the early stage of thinking about settling down and starting a family? Consider renting and saving up money. That way, you and your new partner can make a joint decision about where to live when the time comes.
Consider All the Costs
Considering ALL the costs should be paramount in your decision making. Too often the discussion around renting versus buying leads to the argument that “You are flushing money down the drain by renting! You could be building equity with your monthly payment!”
The problem with this argument is that a $1200 monthly rent payment is not equal to a $1200 mortgage payment. Of course, you could buy a home with a mortgage payment, including the escrow for taxes and insurance, that equals $1200. However, be realistic and think through the additional costs a home owner incurs that a renter does not.
Closing costs. The actual transaction of buying a home costs money. Depending on the price of the home, closing costs can range from a few hundred dollars to several thousand dollars. Often this expense is overlooked or ignored because lenders allow you to roll closing costs right into the mortgage. But remember: That doesn’t make those costs go away! It merely makes the total price you pay for the home higher than originally anticipated.
Interest costs. This is part of your mortgage payment, so we’ve accounted for it, right? That’s true if we are considering the monthly cash flow. However, a $200,000 home you’re paying a mortgage on today will end up costing an additional $186,000 in interest over the life of the loan. That is not an insignificant cost.
Fix-up costs. Typically, new home owners spend additional funds to fix up their house. The costs can include minor cosmetic spending like painting some rooms, or it might be major renovation. It is true that sometimes renters have some of these expenses, too. I would argue, though, that the magnitude of the expense is generally greater when you are spending fix-it money on your own asset.
Property taxes and insurance. These two expenses might be included in the escrow payment you make to the bank every month when you own your home. Sometimes, however, they are not, and therefore must be included in your budget. Additionally, house shoppers tend to “forget” about these expenses when computing “how much house they can afford.” This oversight can result in a dreadful budget mistake.
Maintenance. Finally, there’s the issue of maintenance. As a renter, if your refrigerator dies or your roof starts to leak, you call the landlord. If you own your home, you are on the hook for all maintenance and appliance replacement costs. Depending on the age and condition of the home you buy, these expenses can be large as well as unpredictable.
So, Is It Better to Rent?
“But Dawn, even if I incur all those additional expenses, at least I have an asset that is growing in value! Surely the increase in value will make up for all that expense!”
Maybe. But maybe not. Again, the length of time you live in the home and the condition of the real estate market where you live are big factors. If you bought a home today, took excellent care of it, and lived in it for twenty to thirty years, you’ll likely come out ahead financially versus renting.
In most cases, however, there are too many variables to make an accurate assessment. My point is this: Renting should not automatically be viewed as a bad financial move. For many people, renting really is the best financial decision once all factors are considered.
If you are hell-bent to buy instead of rent, remember to take into account two important concepts.
First, consider all the additional expenses of home ownership to determine a better target for “how much house can I afford.”
Second, buy a house as a place to live, not as an investment. Real estate CAN be a wise investment. But you should think of your house as your home and not as an investment. Why? It’s a fact that given the changing circumstances of our lives and the costs involved, it unlikely your home will work out to be a profitable investment.
Even if your home grows in value, it’s unlikely you’ll use that “asset” to fund your retirement. After all, you need a place to live!
What are your thoughts on renting versus buying a home? Are your views influenced by the messages you heard growing up?