When Renting Makes More Sense Than Buying A Home
If you’re renting, you’re just flushing money down the drain.
How many times have you heard that? I know I’ve heard it plenty of times. But, do you think that’s always the case?
Why Everyone Wants To Own A Home
Owning a home has long been one of the main pillars of the American dream. It’s a goal that we’re practically born with, as much a part of our culture as freedom and independence. Many of us feel an innate need to own our own home because of the sense of security that it provides.
There are other psychological and emotional benefits as well. Home ownership allows you to put down roots in a community. This brings stability to you and your family as you establish yourselves in one location and begin to deepen your relationships with those around you. It also gives you a sense of belonging.
In a more tangible way, owning your home allows you to personalize your environment and shape it to meet your specific needs. When you own the home, you don’t have to ask anyone’s permission to paint the walls or cut down trees. You are in charge and can transform the home as you see fit.
On the financial side, a home can be a good investment. In the long-run, home values usually increase. They are one of the only things that you get to use on a daily basis that typically goes up in value over the long-term. Your car, your clothes, and your electronics on the other hand will have very little value left by the time you’re done with them. But not your home. That will likely be worth even more.
What’s So Great About Renting?
So, if owning a home is so great, why would anyone rent? Two things: time and flexibility. When you pay rent, you’re not flushing your money down the drain, rather, you are buying yourself time and flexibility.
Most homeowners start out as renters because they need to buy themselves time. I know that was the case for me. It takes time to save up a down payment and make important decisions like where you want to work and live long-term.
I own my home but I used to rent. I rented because I needed time to discern where I wanted to plant my roots. Renting allowed me to save up my money while I debated whether I wanted to live in Minneapolis long-term or go elsewhere.
Renting also buys flexibility. If I had already owned a home, the decision of whether or not to stay in Minneapolis would have looked much different.
As a renter, you can easily pick up and move quickly and for little cost. But if you own a home, it’s not nearly as easy. You have to prepare your house to sell, put it on the market, go through escrow, and pay the real estate agent’s fees and other transaction costs. Selling a house takes a lot more time and money than changing rental units.
Comparing The Financial Side Of Renting Versus Buying
One of the common misconceptions that renters have is that if the mortgage payment is the same as their rent, then it costs the same to buy a home. If your rent is $1,800 a month wouldn’t it make more sense to buy a house with a mortgage of $1,800 a month where you can at least build equity?
Unfortunately, it just isn’t that easy. There are a lot more costs involved when you own a home. Three major costs that are often overlooked in quick comparisons are home insurance, property taxes, and utilities. These vary depending on the size of your house and the part of the country you live in. Here in the Minneapolis-St Paul region, they average just over $6,000 a year, but in more expensive places like San Francisco, it’s more than double that.
On top of those expenses, you’ll likely have home improvement costs. One study found that over half of all homeowners purchased homes that needed updates and 69% of homeowners have made improvements to their homes. These are things like painting, replacing appliances and flooring, landscaping, redecorating, and replacing things like roofs and furnaces.
Even if you buy a brand-new home that needs no improvements, you still have to maintain it. Things like yard care, carpet cleaning, HVAC maintenance, pest control, and house cleaning really add up.
Here is a comparison of typical expenses when you rent and own a home:
Mortgage Principal & Interest
Private Mortgage Insurance
One last thing to remember when comparing costs is the size of the home. Often when you move up from renting to buying you also move up in square footage. A larger home costs more to heat, furnish, clean, etc., so even expenses that you already pay as a renter will in all likelihood increase. Heating an apartment that has neighbors on either side and above you is very different than heating a freestanding house. To get an estimate of what your utilities might cost in a new house, check out https://myutilityscore.com/.
How To Decide Between Renting And Buying
As you can see, there are advantages and disadvantages to both buying and renting. What’s best for you will depend on your own unique situation and life plans. Here are some questions that you might find helpful to consider when making your decision:
Do I have the money to buy?
By now you know I’m talking about more than just a down payment. You need to calculate all of the expenses we discussed above to see if you can cover them with your current cash flow.
Don’t forget about the down payment, though. A higher down payment will usually get you a lower interest rate and if you put down less than 20% of the value of the home you will probably have to pay private mortgage insurance, or PMI. PMI usually costs from half to a whole percent of the total loan amount on an annual basis, which is $500 to $1,000 per year for every $100,000 you borrow. With a $300,000 loan, you could be paying up to $250 a month in PMI.
How long will I be here?
Time horizon is crucial to the rent v. buy discussion. It costs around 7% to sell a house, so you need to stay in your home long enough for it to increase in value by at least 7% in order to break even.
While the last couple of years might make this seem easy, think back farther, about a decade. Many people who bought homes in 2006 had to wait over 10 years for their homes to be worth what they had paid for them initially. These people were stuck in their houses and couldn’t move because they could not sell for enough to pay off the loan balance. This put those in an especially difficult place who had opportunities arise in another city or felt that God was calling them elsewhere.
Work With A Professional
A house is probably the largest purchase you will make in your entire lifetime. You shouldn’t take the decision lightly. First and foremost, it is important to run all of the numbers to make sure you can afford it. Then, even if you have the money, consider how the home purchase will affect your other goals. How will it affect your ability to save for retirement, send your kids to college, or live the lifestyle that you’ve always wanted?
When making such a life-changing financial decision, it helps to work with an experienced financial advisor. I can help you assess your current cash flow and estimate how it will be affected by a home purchase. Through my comprehensive financial planning process, we can look at how buying a home, and different types of homes, will affect the other areas of your financial life and your long-term goals.
If you’re considering buying a home and want a complete financial analysis to ensure that you’re making the right decision, click here to schedule a complimentary 30-minute phone call where we can discuss your needs and how I might be able to help you.
About Guide Financial Planning
Guide Financial Planning (formerly Wacek Financial Planning) is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.