Renting Versus Owning: Benefits and Drawbacks
When it comes to making a decision about whether it’s time to buy a home, there are several factors to consider.
A common myth is that everyone should buy a home and that it’s always a safe investment. Yet, that notion typically only rings true when you look at home ownership over long periods of time. What if you simply wanted or needed the flexibility to move with your job? What if you have to take on a massive amount of debt just to afford the home?
There are several other factors to consider that people often overlook when it comes to making the decision of whether it’s time to buy. To help you know when the time is right to make a purchase and so you can make an educated decision, here are the benefits and drawbacks of renting versus owning a home. (For more, see: Pros and Cons of Renting vs. Owning a Home.)
Benefits of Owning
Being a homeowner is a dream of many people. By actually owning real estate, you truly have a place to call home and build a life with your family. The sentimental value of homeownership can’t be overstated and should be the primary reason someone decides they want to own, whether that is stability for your family or a place to raise your kids.
You can make improvements, remodel or do whatever you like to your home because you own it. Crafting it in your image helps build sentimental value that doesn’t have a price tag associated with it.
The costs of owning a home as it pertains to your mortgage are predictable if you have a fixed-rate mortgage. You’ll always know what you owe every month and even if interest rates rise, your fixed-rate mortgage will remain the same, though not all costs associated with owning a home are predictable.
If you have a mortgage you’ll most likely itemize your deductions when it comes time to pay taxes. The mortgage interest is deductible on your tax return and in most cases will allow you to itemize all your deductions since they’ll likely be greater than the standard deduction. This can be beneficial in reducing your overall tax liability.
Drawbacks of Owning
Expect to have many more expenses above beyond the initial down payment and mortgage payments. Your home will need repairs and maintenance over the years. They can range from something as inexpensive as fixing a toilet to something as expensive as having to completely repair the entire plumbing system. The home will need repairs and maintenance, but it is impossible to predict exactly what those will be and when or for how much.
Your home is not an investment. This is contrary to common belief. Even though you may spend less long term when buying a home, that doesn’t mean it’s necessarily a good investment. The average value of American housing dating back to 1890, adjusted for inflation, has only appreciated in value by roughly 100%. (For more, see: To Rent Or to Buy? The Financial Issues.)
There are pockets of rapidly increasing and decreasing prices, as there are with the stock market, yet it’s miles from what the stock market has achieved in returns over the same time period.
Other reasons you shouldn’t view your home as an investment include:
- When you add all expenses such as insurance, property taxes, maintenance and repairs, mortgage interest, closing and selling costs, furniture, inflation and more to the equation, your actual return on your investment is quantifiably lower.
- Your home is an illiquid asset. In order to access the equity in your home, you either have to sell it or take out more debt using a home equity line of credit (HELOC). Selling your home can take months and isn’t something that happens overnight.
Benefits of Renting
The flexibility that renting provides is one of the main reasons people rent in the first place, aside from actually not yet being able to afford to buy a home. If you’re unsure where you or your family wants to live, renting is probably the most practical choice.
I’ve been renting in Seattle for several years now. I’ve lived in Capitol Hill, Upper Queen Anne and Lower Queen Anne. By renting I’ve been able to spend time in various communities to see which I might be willing to buy a place in someday. I enjoy trying out new locations. Having the flexibility to move and not be tied down to a specific location is one of the main benefits of renting.
Renting tends to be cheaper than owning a home. It may not seem like it. However, renting is one fixed cost for the term of your rental agreement. Even if your monthly rent is greater than or equal to what you would potentially pay per month with a mortgage, remember there are several more costs associated with homeownership, and the mortgage payment isn’t the only expense it should be compared to.
Your landlord is responsible for repairs and maintenance. If you have an issue with your dishwasher or washing machine, you don’t have to worry about fixing it. Hopefully, you have a good landlord who will take care of it for you promptly.
By renting and foregoing a home down payment, you can use your cash towards other financial goals or long-term investments. As I mentioned above, the stock market has historically greatly outperformed the average American household home appreciation.
Drawbacks of Renting
A drawback of renting is that you’re making payments towards an asset that you aren’t building equity in. In return for the flexibility and lower cost of renting when compared to home ownership, you lose the ability to develop equity in an asset. While homeownership shouldn’t necessarily be viewed as an investment, equity in your home can be accessed at a later date if needed.
You also don’t receive any tax breaks for renting like you do with paying mortgage interest.
In most cases, rental payments aren’t fixed for several years at a time. They’ll likely increase over the years as opposed to holding a fixed rate mortgage.
Another drawback is that by renting, you do not have a place to truly call your own home yet. Renting a home is temporary, and that sentimental value associated with owning a home can’t be achieved through renting.
Decide What Is Best For You
The renting versus owning a home decision is one of the biggest financial decisions we’ll face in our lives. Renting and buying each has their place.
Understanding when it makes sense to buy is key to ensuring you make a smart financial decision for you and your family. Don’t buy for the sake of buying because you feel that everyone should own a home. Wait until the time is right and make an educated decision based on you and your family’s goals. (For more from this author, see: Why You Should Have an Emergency Fund.)
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