Whether renting vs owning a home, it is a major decision. It doesn’t just affect how much money you have left at the end of the month, it also affects your lifestyle and the size of the savings you accumulate over the years.
Every day, people buy homes when financially they’d be better off renting because it’s important to them to have a place to put down roots and because they see owning a home as an investment that can grow and as a source of tax deductions.
Similarly, people rent all the time for the flexibility and minimal responsibility it offers, even though they’d amass a larger net worth over time if they bought a place.
Of the two Renting vs. Owning a Home, the bias often veers toward ownership. It’s big business for everyone from mortgage lenders to real estate agents to home improvement stores. But owning isn’t universally better than renting, nor is renting always simpler than owning.
Renting
The biggest myth about renting is that you’re “throwing away money” every month. Not so. First of all, you need a place to live, and that always costs money, in one way or another. Second, while it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house.
When you rent, you know exactly how much you’re going to spend on housing each month. When you own, you might pay nothing more than your mortgage and regular bills one month.
But you’ll never have to pay to replace your roof when you rent. Your monthly, home-related expenses, such as renter’s insurance, tend to be more predictable.
As a renter, though, you do face unpredictable rent increases each time your lease is up for renewal unless you live in a city with rent control and your apartment is covered by it.
If you live in a desirable part of town, rent increases can be steep.
While homeownership is often touted as a way to build wealth, your home can lose value. Lots of value. The acceptable neighbourhood you moved in could decline.
Do you like having your evenings and weekends to use as you please? Do you work long hours or travel frequently? If so, then the time commitment that comes with homeownership might be more than you want to take on.
There are always projects around a house that you will need or want to take care of.
If you rent, your landlord will take care of all the repairs and maintenance, though of course they may not be done as quickly or as well as you would like.
Owning
Homeownership brings intangible benefits such as a sense of stability, belonging to a community, and pride of ownership. However, it’s not good for restless or nomadic types.
Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down. Even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.
The overall cost of homeownership tends to be higher than the overall cost of renting, even if the monthly mortgage payment is similar to (or lower than) the monthly cost to rent.
Here are some expenses you’ll be spending money on as a homeowner that you don’t have to pay as a renter:
- Property taxes
- Trash pickup
- Water and sewer service
- Repairs and maintenance
- Pest control
- Tree trimming
- Homeowners insurance
Perhaps the biggest throw-away expense is mortgage interest, which can make up nearly all of your monthly payments in the early years of a long-term mortgage.
Even renovation projects don’t often increase the value of your home by more than what you spend on them.
Once you add up all these costs, you might find that you’re better off financially by renting and investing the money you would have put into a home into a retirement account.
Special Considerations of Renting vs. Owning a Home
Which option is best for you isn’t just about money, it’s also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, that renting is throwing away money. Or that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. Housing markets and life circumstances are too varied to make blanket statements like these.
Still, despite the added expense and extra chores associated with owning a home, many people chose it over renting. It provides a more permanent place to raise children and often it offers the only way to have, or create, the sort of residence people want. Ultimately, the decision to rent or to own is not just financial, it’s also emotional.
See Also: Renting vs. Buying: What’s the Better Financial Decision?