Owning your own home may still be the great American dream, but, the influx of foreclosures in recent years has made it a nightmare for millions. If you are considering purchasing a home, I challenge you to at least think through the advantages of renting before you buy. Here are a few.
1. Less risk
Strangely, risk seems to be the factor least considered when one contemplates buying. Consider it. If you are married and are basing your mortgage payments on two incomes, you are in lala land if you ignore the possibility that one of you could lose your job. With unemployment at 10%, there is a one in ten chance of a single income being lost and even greater odds that one of your two jobs could disappear. Reality check: renters face zero percent chance of foreclosure. Bank of America is estimating that their foreclosure rate will be up 600% by December of 2010. Obviously, lots of home owners didn’t correctly factor risk into their purchase decision. Don’t allow yourself to be part of that statistic.
2. Less hassle
Sewer backed up? Call the landlord. Roof leak? Call the landlord. If you don’t own it, you don’t have to fix it. Homeowners, on the other hand, do. Renting saves not only the hassle of fixing whatever breaks, but maintaining the residence. A renter doesn’t even have to mow…or own a lawnmower.
What if you get a great job offer that necessitates a move? If you are a renter, you simply move. I realize you may have to fulfill a lease agreement, but doing so is a breeze compared to selling a house. The nuts and bolts (getting the house prepped, hiring a Realtor, etc) are bad enough, but what if you need to move before your house sells? You will be paying both rent in your new location and also your mortgage on your unsold house. You will be an absentee home owner and eventually a motivated seller. Yes, this is all doable, but it is a hassle and can become very expensive.
4. Save money.
According to an article in Get Rich Slowly, a buyer can reasonably expect to pay 78% more in monthly expenses than a renter for the same house. This chart compares renting versus buying of two very similar 1850 SF houses in the same neighborhood in the Seattle area:
* (less standard deduction)
I recommend you read the post for all the details of this study, but the point is this: renting will often cost less per month than purchasing.
5. You are not throwing your money away.
Don’t swallow the old myth that renting is throwing your money away. While you don’t get your money back, you are nevertheless getting something for your money: a place to live. This is not throwing it away. Besides, buyers don’t get a huge chunk of their money back either. In the above example, the only portion the buyer gets back from his $2,690 monthly expense is the principal on the loan, which, in the first five years of the loan, averages only $419. The buyer, therefore, is “throwing away” $2,217 a month compared to the renter’s $1,515.
6. More liquidity.
By now you are tracking with me, but a renter, if he does indeed save by renting, has liquidity and therefore flexibility with that saving differential. Again, referring to the above chart, the renter has over $1,000 a month he can use to pay off debt, build his emergency fund or invest for retirement. The buyer does not have those options.
7. Tax advantages of owning are overstated.
Yes, owning has tax advantages: no capital gains taxes on profits of up to $250,000 for a single homeowner or $500,000 for married homeowners is a very sweet one. However, with the recent plunge in real estate values and the projected growth of value sketchy at best, capital gains doesn’t seem to be a huge factor.
Homeowners can deduct the interest they pay on their mortgage, but for many this deduction won’t kick in until the interest, along with other itemized deductions, exceeds their standard deduction ($11,400 for married couples and $5,700 for singles in 2010).
But renters have one huge tax advantage: no property taxes! In our example, this comes to $407 a month.
Don’t misunderstand me. I am a home owner and have no regrets. I still believe that owning a home can be the great American dream. However, the decision to buy instead of renting is a huge one. Hopefully, these thoughts on renting can help you make the decision that is best for your family.
Photo by GoTRISI