Renting vs. Owning Your Home
Homeownership has long been called the Great American Dream, and more people own homes today than ever before—about 70 percent of all Americans. A changing market can open new opportunities if you’re thinking of making a change to your living situation. Here are a few things to consider if you’re trying to decide between owning and renting.
When to rent
While most people prefer to own a home, there are some circumstances in which the benefits of renting make sense:
Flexibility. If you’re a free spirit or like staying mobile, it’s a lot easier to pick up and move if you rent. Selling a home when you move takes time.
Timing. There are costs associated with buying and selling a home. If you see yourself moving in a couple of years, it probably makes financial sense to rent in the interim, and then buy when you’re settled.
Convenience. The toilet backs up? No problem; just call the landlord. Renters have little or no responsibility for the time and expense that go into home maintenance.
Cost. Normally, renting is cheaper than owning. While monthly mortgage payments and rents may be similar, a homeowner also has to pay for property taxes, homeowners insurance and maintenance. In cities where the cost of homes is particularly high, renting allows you to afford to live in a neighborhood that might be out of your price range if you were to buy.
While renting can seem simpler than owning a home, there are downsides:
Your monthly payments go to your landlord—you don’t build any equity.
You have no control over rent increases, which makes long-term budgeting difficult. And if your landlord sells the property, you may be looking for a new place to live.
You can’t really make the place your own. Most landlords won’t permit tenants to make substantial changes to a rental property, and many don’t allow even simple cosmetic changes such as paint. You can long for red walls, but you’ll be stuck with beige.
The owner is responsible for the maintenance. That can be a good thing if your landlord is particularly responsive and has pride in his property. If not, you’ll have to learn to live with the rusty bathtub and overgrown yard.
When to buy
Financial guru Suze Orman calls owning a home “the absolute best investment out there, bar none.”
In many cities across the country, the last five years have seen dramatic growth in the value of real estate, with annual increases in the double digits. Most experts agree that the market is taking a much-needed correction, and expect appreciation rates to settle down to their historical average of about 4 to 5 percent a year. Even at that rate, homeownership is a great way to build wealth over time with a relatively small cash investment.
Jane Bryant Quinn, the personal finance columnist for Newsweek, agrees:
You can make splendid profits even in a mediocre market, thanks to the leverage you’re allowed,” she writes. “Leverage is the great advantage that homeowners hold over owners of bank accounts or stocks. You control the property for a down payment of only 5 to 20 percent.
Let’s say you buy a home for $300,000 and put 10 percent down. That’s an investment of $30,000. If your house appreciates 4 percent, you realize a gain of $12,000. The first year, you make $12,000 on a cash outlay of $30,000—a 40 percent return on your investment. That’s tough to beat.
There are plenty of other reasons why buying a home makes sense. Here are a few more to think about.
It’s all yours. You can paint the walls whatever color you want, add a room, remodel the kitchen, or plant a big shade tree. There are freedom and pride in owning a home that renters just don’t experience.
You’re building equity. When you write a rent check, you’re paying for the right to live in someone else’s property; when you write a mortgage check, you’re building up ownership in your own home. You can also borrow against that equity to make major purchases, pay for your child’s education or make other investments. Plus, all the interest expenses associated with a home equity loan are tax-deductible. Let’s say you’re renting, and have credit card debt of $10,000 at 15 percent. None of the interest you pay is deductible.
Great tax benefits. The IRS lets you deduct your mortgage interest as well as your property taxes. Plus, when you go to sell, you get to take the first $250,000 in profit if you’re single, or the first $500,000 if married, without paying capital gains tax. The cost of home improvements is also deductible when you sell your home. There are other tax advantages available. For example, if you work out of your home, you may be able to take deductions for your home office.
You’re in the game. For most buyers, their first home isn’t their ultimate dream home, but it is the first step towards that dream home. Your home appreciates over the years, and perhaps you do some improvements that increase the value even more. Over time, the equity in your home builds into a great down payment on that dream home in the future.
Security for retirement. Rent goes on forever, but the mortgage on your home will eventually be paid off. Having a “rent-free” place to live provides a lot of security in your retirement years and allows you to spend that extra money enjoying yourself.
The timing is great for buyers. In most markets, there’s plenty of inventory, which means lots more choices for you and more room to negotiate.
The bottom line? Buying a home is one of the most important decisions in life. The time to buy a home is when it makes sense for you: You’re ready to own a home, you can afford it, and you plan to live there for a while. Over time, you’ll be able to ride out any downturns in the market and benefit from the upturns… and you’ll spend that time in a place that you can really call home.
