Is it time? Home-ownership Versus Renting





Look at you, you’re killing it right now at life. You’ve set the ground work for your career over these past few years, you’ve paid your dues and now you’re climbing the corporate ladder at a steady rate. It’s getting serious with your significant other and the sound of wedding bells chiming are right around the corner for you two. You’ve built a faithful group of friends and really feel like you etched out a space for yourself in your community. You’ve decided this is where you want to plant your roots, settle in and raise a family. So, you think to yourself, I want a house. Maybe, that scenario doesn’t resonate with you. Perhaps, you just graduated from college and starting to put this adulting thing together. Your career is budding, you’re in an entry level position doing the work the higher ups won’t touch but you’re paying your dues gaining experience and are on your way. You’re young, open to new experiences, new challenges and new cities. You’re looking for that cause you can dedicate a good portion of your life to improving. You’re not ready to set roots, you just want a cool place to stay. The point behind these two scenarios is that you have to do what’s right for you at the time. Home-ownership or renting comes down to the lifestyle you want or can afford. This blog post will point out the advantages and disadvantages for both owning a home and renting.


Home-ownership


Advantages:


· Equity- Is defined as the difference between the market value of a house (current worth) and what you owe on the house. For example, Mark buys a $100,000 house with a $20,000 down payment and now has a $80,000 mortgage. If the market value of the house becomes $120,000 he has $40,000 in equity ($120,000 -$80,000). As you pay down your mortgage, you’re building equity. Just note, properties can increase or decrease in value over time.


· Borrow against equity- While you’re building equity in your home you can borrow against it via a home equity loan or home equity line of credit (HELOC) aka a second mortgage. Note, these loans come with a higher interest rate than your primary mortgage but still usually lower than a credit card. Compare rates before you decide.


· Stable living arrangement- When you buy a house you’re locked into a 15-30 yr mortgage. If you have a fixed rate mortgage, your housing costs stay relatively the same. If you stay current on your mortgage, property tax, insurances you can’t lose your home and no landlord can evict you. It is your home. You don’t have to move every few months. A home is a stable environment to raise your kids.


· You can customize it to your liking- If you want purple walls, you can have purple walls. Any renovations you want (and have the money for) you can get. If you want to knock down walls so you can have a bigger bathtub, you can knock them down with no need for permission.



· Pride of ownership


· Tax credits- A tax credit is a dollar-for-dollar reduction on your tax liability. For example, if you qualify for a $5,000 tax credit you get to reduce the amount of tax you owe by $5,000.

o Energy-efficiency tax credit- it lets you claim a percentage of the cost of installing energy efficient windows, small wind turbines, and solar energy systems to your home (details here).


· Tax deductions- A tax deduction is an amount you subtract from your gross income to figure out how much of your income is taxable. For example, if you gross income is $80,000 and you have a $5,000 deduction your taxable income is $75,000. Deductions only come into play if you itemize versus taking the standard deduction.

o Property taxes-is deductible from your federal taxes.

o Points- Are upfront fees you pay when buying a home to lower your interest rate of your mortgage. They are deductible the year you pay them.

o Interest on home improvement loan

o Interest on home equity debt

o Home office expenses

o Moving Cost

o Prepayment penalties- If you pay your mortgage off before a set time you pay a penalty (avoid these clauses in your mortgage).


· Home can increase in value


Disadvantages:


· High up-front costs- Usually you need to have access to capital for a down payment, closing costs, points, inspections, private mortgage insurance (PMI if less than a 20% down payment) and other fees.


· Monthly cost to owning a home- Costs include mortgage interest, mortgage principle, property taxes, water & sewer, pest control, homeowner insurance, and flood insurance to name a few.


· Maintenance & Repairs- When something is broke you need to come out of pocket and get it repaired. If you need a new roof, there goes roughly $12,000. Its important to put aside money monthly for such emergency home repairs.


· Long-term financial commitment- Mortgages run from 15-30 years.


· Usually more expensive than renting


· Home can lose value


Renting


Advantages:


· Flexibility- Renting tends to be in short term leases that run from 6-12 months. If you need to move around for a better job market or for a promotion, it’s easier to move as a renter versus a home owner. It can take months to sell a house depending on your local market.


· Less strenuous process- You usually don’t need a real estate agent to find an apartment. You don’t have to go apply for a mortgage at a bank, or come up with money for a down payment, points or closing costs.


· Usually costs less to rent- You pay your monthly rent, some items can be included such as heat or other utilities. There is no PMI, no large down payment and no property taxes.

o Especially if you live in a high cost of living area such as San Jose or San Francisco, CA where the price of homes are huge in those cases it’s better to rent.


· Not responsible for maintenance and repairs- If something breaks it doesn’t cost you a thing. Contact the property manager to have it fixed. No need to put in time in mowing the lawn, shoveling snow and cleaning gutters.


· If you expect your income to decrease (going back to school full time) you can move into a cheaper place.




Disadvantages:


· Not building equity- You have no mortgage so no equity is being built with payments.


· Not your property- Landlord can kick you out when your lease is up.


· Unstable costs- Landlord can hike up the rent when your lease is up.


· Unstable living arrangement- Moving from place to place is not a great environment to raise a family.


· Can’t customize the property- You can’t make the renovations you’d like (so no bigger bathroom).


· Not investing in real estate- You have no property. Real estate investing is one of the major keys to building wealth.


· Pay someone else’s mortgage- When you pay your rent a portion is going toward the mortgage on the property. This in turns builds equity for the property owner.


As a financial coach I am biased towards home-ownership because it’s a great tool to build wealth. You can build wealth via equity, appreciation of property value, renting, making the property to an Airbnb, and house flipping. I hope the information laid out here is a starting point for your housing research. There are both good and bad points for both home-ownership and renting but in the end it all comes down to the lifestyle you want to create and where you are at in this moment of life.


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