One of the greatest myths in America is that everyone should
own a house and if you don’t you are wasting money. There are times when owning
a home makes financial sense, but there are also times when it does not. All to
often people jump into purchasing a home because they think it is a good idea
but they do not stop to consider the whole picture.
I can hear it now “But Cipher, didn’t you just say in your last
post that you are looking to buy a home?” Yes, I did say that, however, what
you need to know is I looked at the market and considered the costs before
making the choice. In my last post I talked about some of the basic costs
associated with the initial purchase of a home. Now it is time to dive in and
talk about some of the costs associated with renting vs. owning a home.
Costs Associated with Renting
The cost of renting is often times straight forward. The
renter pays an agreed upon sum that is dictated in the lease. The price is locked
in by the lease, some places have laws about how much the landlord can raise
the rent from year to year.
In many cases the
maintenance of the property is the responsibility of the landlord. The renter
of course takes care of small things like replacing light bulbs and the
occasional Liquid Plumber, but in my experience, there are not a lot of maintenance
Some common costs to rent are:
- Utilities (sometimes included)
- Renters Insurance (optional but a good idea)
- Parking Spot Fee
- Pet Fee
The place I am currently renting actually has most of the
costs rolled into one fee. I pay rent and insurance; the utilities and parking
are included. I did have to put down one-month deposit at move in.
Depending on the landlord it can sometimes difficult to get
your whole deposit back. Because my job requires a lot of moving, it made the
most sense to rent from an economic and flexibility standpoint. My costs are predictable
and I never had to worry about selling my home while trying to switch jobs.
Story time: My brother rented for several years and he kept
hearing people say he was “throwing away his money” by renting. Interest rates
were low and the mortgage payment would be a little less than his rent payment.
Sounds good right. Well, not so much.
Soap box time: You are not throwing away money; you are exchanging
it for a roof over your head. There is value in this transaction.
The thing that my brother failed to consider when deciding
to buy a home was everything he would have to do and pay for to keep the home in
good shape. He purchased an older home so it should come as no surprise that
there were maintenance issues. Yes, the mortgage was about $150 less per month
than his rent, but when the roof started leaking the several thousand dollars needed
for repairs was not so easy to come up with. Even without big ticket items like
a roof, there were several sneaky expenses that more than made up for the $150 “savings.”
Read on and you will see some of the costs my brother failed
Costs Associated with Ownership
The cost of owning a home is not as straight forward. The
mortgage is fairly easy to predict if you have a fixed interest rate. However, if
the property value increases significantly that can have a huge impact on
property taxes, which will increase the escrow portion of the monthly payment.
In addition to these basic costs home owners need to consider maintenance fees
and repair costs. Even in newer homes, if you don’t pay attention to
preventative maintenance small issues will build into big issues eventually.
Some common costs to own are:
- Home Owners Insurance (required)
- Home Owners Association Dues
- Lawn Care
- Maintenance Costs; preventative and repairs
- Property Taxes
- Interest Costs
As you see some of the items are the same, but there is a
difference in cost. Renters insurance is fairly inexpensive but homeowner’s
insurance is usually more. No matter where you live one usually pays utilities
but as my brother learned electricity for his apartment vs. house was noticeably
more. In the apartment water and garbage were included but he paid these costs
for the house.
Where I live home owners associations are very common. One
friend pays about $95 a month, another pays $150, and on the extreme end a coworker
pays $650 per month. In each price point there are amenities that come with the
fee. Many people don’t think of this monthly cost when deciding if renting vs.
owning is better. They think mortgage vs. rent.
Don’t even get me started on having to take care of a lawn.
First you have to buy all the equipment, then you actually have to take care of
the lawn. Or you end up paying someone to do it for you. In either case, you
are still paying for upkeep that is included in many rental options.
Interest is another major expense. I have discussed this
before from different perspectives. When someone asks you what you paid for something,
we often give the sticker price. What we fail to consider is the amount we pay
for the privilege of borrowing money.
Here is a little math for the average home price in America.
Yes, I know the amount can vary greatly from state to state and even city to
Home Price: $266,700
Average Interest: 4.40%
Average Length of Loan: 30 Years
Interest Paid: $214,091
Estimated Mortgage Payment: $1335
Total Cost of Mortgage: $480,791
Did you really pay $266,000 for you home. NO. You paid so much more and unless the prices more than doubled most people don’t make money on houses. They are great to live in, especially long term. But a house is not a great investment. According to business insider, the average rate of return for a house is 1.3% compared to 3.375% on other investments.
Back to the soap box: you are not throwing away money when you rent.
Final Thoughts on Rent vs. Buy
Some additional things I considered when making the rent vs
buy decision. Where I live a metro station is being built; the cost of homes are
high but when the metro line goes in the prices are expected to jump about 20%.
I am tired of renting apartments, many of the townhomes or
houses for rent are only available for a limited lease. Most people are holding
onto their property so they can sell when the metro comes in. This means I will
have to move again in a year or so, which is not ideal.
It does not make sense to rent now and buy after prices jump,
I would probably be priced out of the market anyway. But the biggest factor is the
area I now work in has a lot of jobs opportunities so I should be able to stay
put for an extended amount of time. With all costs considered, now looks to be
a good time to invest in a home vs. renting.
I am not saying people should not buy homes. If it makes financial
sense within a well-developed budget, by all means purchase a home. For me, the
timing, the budget, and the willingness to be responsible for a home has led me
to make the choice to purchase.