There are many ways that you can kick off a feverish argument over a topic. You can declare in New York City that you know the best pizza place in town. You can declare in Austin, Texas that you know the best BBQ place in the state. You can argue to Europeans who is the best soccer player ever. And just about anywhere in America you can opine on whether it’s better to rent or own your place of residence. That’s a more universal opinion than any of the others I mentioned. Because while you may not care about pizza, BBQ or the world’s greatest soccer player you must have a place to live. For decades in America the conventional wisdom was that home ownership was a core principle of the American dream. I think that proposition changed during the US housing crash in 2007-2008 but there’s definitely still a solid debate over whether, in the long run, owning or renting your domicile is the better option. Having experienced many versions of American housing situations, including owning and renting single family homes, owning and renting apartments and even living in government owned housing while in the US Army, I finally feel qualified to give what I think is a well informed opinion on the subject.
What I’ve learning in the 26 years since I purchased my first home, a brand new construction house in Austin, TX, is that there are three main components to consider when deciding whether owning or renting your residence is right for you.
- Money
- Lifestyle
- Risk Tolerance
Money, because for many people the housing debate comes down to comparing what rent prices are versus the cost of carrying a mortgage, assuming you don’t have the cash to pay outright for a property (and most people don’t). But the rent versus mortgage discussion is a gross oversimplification of the costs of owning a home. More on that later. Lifestyle, because I’ve found that not all housing decisions are compatible with certain lifestyles. I found this out early when my brand new home sat empty most of the time because my job had me traveling 4-5 days per week and I’d spend some weekends traveling with friends. Risk tolerance, because every choice of housing involves some level of risk. And not just financial risk either. Moving into a new place can change your life completely, for better or worse and often you don’t know how your life will change till you fully commit and move into a new place.
Money and Housing
Whenever you talk about money and housing the elephant in the room comes down to housing as an investment. It’s widely stated that renting is basically throwing money away because an owned property is an asset that can grow in value and later be sold with the prospect of a nice return, provided the conditions are right and you keep the property long enough. That’s true (maybe) but it’s also true (definitely) that the provision of housing as a service is a legitimate one. Renting a home or apartment might be more costly in the long run but it’s also a simpler proposition in terms of finances. The way renting usually works in the US is you pay first month’s rent, last month’s rent and a security deposit (usually one month’s rent, but could be more) prior to moving in and then pay a flat amount monthly for the lease term as you go until the end of the agreed lease term (usually a year). Understanding that renters must pay for their own utilities that add to the cost of renting (the same as owners do) there is a good amount of cost certainty as far as major costs during the lease term. What happens at the end of the lease term is certainly a point of risk for renters as the landlord could request a large percentage increase or otherwise decline to continue renting the property. For the prospective homeowner the costs to purchase and maintain the property are in greater question. In some cases it’s prudent (or even required) to engage an attorney to guide a prospective buyer through the home purchase contract process. A home inspection by a professional inspector is both prudent and required by mortgage companies prior to purchasing a home. Both of these services have varying costs. For prospective homeowners there’s also a negotiation with mortgage lenders that occurs (except in the very rare occasion where a property is purchased for cash) which affects the cost to own property. Down payment %, interest rate and the loan term (15 yrs, 30yrs, etc.) are key points of negotiation.
Once a person has chosen whether to rent or own the difference in some key costs that must be borne in order to keep a property are important to consider. A homeowner must pay for home insurance, property taxes, maintenance costs and perhaps even Homeowners Association (HOA) fees if the community has common amenities. The cost of all of the above to a landlord is included in the monthly rent, with the exception that renters usually are required to have renter’s insurance that covers their personal property. But renter’s insurance is usually very low cost unless a person has very extravagant personal items. While the cost of the rent may actually be more than the total cost of the landlord’s cost the renter does have one advantage during the lease term, and that’s price certainty. Because if the refrigerator that came with the property or the HVAC unit go out during the lease then it’s up to the landlord to pay to get those repaired or replaced. The landlord is then exposed to the market for those services, while the renter is not. So it’s clear that the renter has a short-term advantage when it comes to cost certainty. The renter also has a big short-term advantage when it comes to the amount of money needed to put a new roof over their head. The fees charged by landlords to rent will certainly be much less than the cost of a home down payment, attorney fees, inspector fees and other buyer responsible closing costs. Then the homeowner also bears the risk for rising HOA fees (if they apply), home insurance premiums and property taxes, in addition to the cost of mortgage interest. I realize that understanding all this may make it seem like owning a home is foolish from a financial perspective but homeowners do have a couple of aces in the hole in their favor. First, an owned property could potentially generate income, if the owners of the home decide to become a landlord themselves. Second, the owners of the home can decide to sell their property in the future which may or may not yield a profit, but will definitely result in some money that can be used to meet their needs at that time. A renter has neither option. At the end of their lease the renter leaves and (hopefully) gets back their security deposit.
So which move is better money wise, buying or renting? It depends. A frustrating answer I know but the next two housing factors are very important. What I will say is that, at a minimum, a person buying a property should be able to part with a 20% down payment on the property of their choice as well as all the costs associated with moving in, and still have emergency funds available to them after moving in. (This is very important since failing to have extra savings after a home purchase leads people to become house poor.) Then the cost of the monthly mortgage payments, plus HOA fees (if applicable), property taxes and home insurance should be no more than one-third of take home pay for the household. For most people in most places in the US all of that is more than they can handle financially. So often people take big risks by lowering their down payment, extending their mortgage loan term and hoping the value of their property will rise to a level where they can refinance their mortgage. It’s a risk that unfortunately may not end well but that’s why the last factor (risk tolerance) is so important in terms of whether owning or renting is right for anyone. Suffice it to say that the reality of the home ownership equation is that it’s about a heckuva lot more than just the monthly mortgage payment.
Lifestyle and Housing
Put simply, home ownership is best for people whose long-term plan (at least 5 years, but preferably more) is focused on stability. Meaning, you expect to be employed in the same area (or better yet the same job), you expect to be home most nights and you expect to have enough time to take care of all the responsibilities of owning a property. And failing having the time to take care you have the money to pay others to do it for you. My experience has firmly been that it’s a waste of money to own a property if you don’t spent the vast majority of your time there and don’t have the time to take care of the property. To that end, owning a condominium (condo) apartment or townhome, which typically require less maintenance (but do come with HOA fees) may be a better fit. Condos versus single family homes have their own trade offs which I won’t go into here but it’s an option. Still, if your lifestyle is very dynamic and you don’t know where you’ll be in the next few years the risk of having home ownership be a money losing proposition is high. That in addition to the stress of trying to sell your newish property quickly when you make an abrupt life decision. Owning a property is best suited to a stable lifestyle such as a family who plans on deep roots in a community. Of course plans can change but it’s surprising how often people who are planning on change still dive into home ownership. When I was in the military I met a number of soldiers with families who would buy a home in each duty station and sell the home 2-3 years later when they were transferred. Such an approach can work pretty well when housing markets are rising but can be very costly when housing markets are falling. Again this speaks to the risk component of a person’s choice of housing.
Another important lifestyle consideration regarding your choice of housing has to do with how organized or hectic your living situation might be. Unlike with ownership, renting comes with rules, restrictions and fees that are laid out by the landlord. If your lifestyle is quiet and organized this likely won’t be a problem. If your lifestyle is hectic and loud at times (like it is in a family with children) there are more pitfalls associated with renting. Kids will accidentally break things from time to time or write on the walls and engage in other minor mischief that your landlord might make you pay for. With renting you also lose the ability to personalize a property to your tastes beyond putting up pictures on the walls. In some cases landlords will allow you to paint rooms whatever color you want, as long as you’ll paint it back to the color you choose when you move out. So if your needs are more basic and you’re not a stickler for the design of a home or the style of the home then renting may be a good option. But if your needs are more dynamic and you want a place that reflects variety and your own sense of style then ownership is the better option. Basically ownership offers you more freedom than renting, but it does come at a cost and with added risk which I’ll cover in the next paragraph.
Risk and Housing
Knowing how much risk you are comfortable in bearing (your risk tolerance) is a critical aspect in the rent versus own housing decision. By far owning carries more risk than renting but both options have their own unique risks. As an owner of a property you can be met with many different unpleasant surprises after your purchase. The neighbors could be loud as hell. There could be deficiencies with the property not found on the home inspection. The town could (and probably will) decide to raise your property taxes if the sale price differs greatly from the town’s prior assessment. Quality of life in the neighborhood could either decline or not increase as much as you thought it would, which would make everyday life difficult and affect the long-term value of the property. I could go on but I won’t in the interest of brevity. Suffice it to say that property ownership comes with a broad range of risks. Is it worth it to take on those risks? Certainly many Americans feel it is, but they also may not have counted on those risks when making the purchase decision. Renters have risks too, but they are limited by the term of their lease, which in the US is generally for one year. As a renter under those terms if you’re not happy with a property or a neighborhood you can seek a new place to live within a year. For renters the quality of life in a particular neighborhood is still a risk, but it’s a short-term one. Same thing if the property itself is a lemon. You can’t be forced to deal with the problems in a rental property longer than the term of your lease. That’s one reason why I think that people who do want to rent should avoid the temptation to sign leases of much more than one year.
By far the biggest risk that renters face is landlord risk. A landlord that’s attentive and quick to address problems can make a renter’s life a lot easier. Unfortunately you won’t know about that till you’ve signed a lease. Some landlords will literally do the minimum so that renters don’t file a grievance with the local housing authority. Landlords like that always try to make the cheapest, quickest fixes in order to maximize their profit on the property. Years ago I had someone advise me that it’s better to rent from a corporate landlord rather than an individual person. I’ve found that to be true. Although some apartment complexes (which are typically owned by corporations) can be poorly run my worst experiences with renting have been when dealing with individual landlords. One time my family ended a lease of a single family home and cleaned the place from top to bottom after moving out. The landlord raised a number of nit picky issues and kept our security deposit. Another time I rented from an elderly gentleman who seemed very kind but after I moved in he put the lord in landlord. I had signed a two year lease on that place and decided to vacate early (forfeiting my deposits) rather than live under his rule. All things considered if I ever rented again it would be from a corporate landlord, but you never truly know the quality of a landlord till after you move in. One thing you can do if you plan on renting in an apartment complex is ask for a tour of the facilities. Look closely at how clean and orderly things appear to be. Look for signs of neglect and disrepair or trash on the ground. If a place looks clean and well maintained that’s a good sign that the staff is attentive and the owners care about their property.
Final Thoughts
It’s very likely that what I put forth above (which is certainly not complete) has not helped you make a decision about renting versus owning a property. And that’s okay by me. I’m happy to just lay out the primary considerations in making the decision, especially the ones that go beyond money. Because money is what people tend to focus on strongly when making their housing decisions. Money should be a main point of focus, because if you’re not financially prepared to purchase a property then the other considerations are pointless. There are some people who advocate spending as little as possible on housing while maximizing financial investments instead of relying on owned property as an investment. I can’t argue with that strategy but it’s not without its pitfalls. Minimizing expenditure on housing surely has an impact on lifestyle. Maximizing financial investments can be painful during prolonged bear (down) financial markets, so you’re really trading one risk for another.
Like any of life’s strategic decisions the right answer regarding ownership versus renting will be vary for different people at different times. One thing that I’ve learned for sure is that it’s never a good reason to do something because that’s what everyone seems to be doing at that time! Your decision to rent or own your place of residence should be guided by your situation with regard to money, lifestyle and risk tolerance (at the very least) at the time you’re making the decision. The other very broad piece of advice that I’ve learned over the years has been that if you’re thinking about purchasing a residence but have doubts, then wait till those doubts are satisfied before buying. Because once you get into property ownership reversing the process is time consuming, costly and emotionally draining. I once heard someone say, and I truly can’t remember who, that the easiest way to solve a difficult situation is to not get into it in the first place. That’s as fine a point as I can make to end this post.
In The Midst Of A Journey 