What's the best choice when it comes to renting vs. owning a home?
Homeownership is a more elusive goal than it once was. However, it’s a goal that most young people still have in mind. Of course, to buy a home and pay a mortgage is to build equity, which is objectively better than paying someone else’s mortgage.
But buying a home isn’t always the better alternative to renting. There are multiple financial considerations that should go into the biggest financial decision you’ll probably make in your life.
In this article, we will look into:
The most obvious and important benefit of buying a house is owning a tangible asset. But there are both tangible and intangible benefits to homeownership.
House values change, and while the trend has been a constant increase over time, there are no guarantees that the trend will continue. But regardless, the fact remains that in the end, you gain equity.
The benefits of homeownership, or even of gaining equity, are immense:
Of course, there’s also the emotional comfort of owning your home. While it’s not always apparent, there are many things that can lead to you losing your home if you rent.
This also has immediate financial implications if you are forced to move for any reason. Most glaringly, your landlord can ask you to move out when your lease is coming to an end without needing a specific reason.
The notice they must give varies by state, but regardless, your position when renting is never guaranteed or permanent. This can easily lead to you needing to move, which is an expensive thing to do after just a few years at a place you’ve made your home.
Buying a house is more expensive than many people realize. The benefits of homeownership over renting are definitely better understood. But you should consider the finer details of the expenses of homeownership.
One major drawback is that houses are illiquid assets. The intangible benefits of the stability of homeownership are clear. But your home, being an asset, is also a serious responsibility.
There is no guarantee that you will sell it when you want to. Even if you can sell it, you may end up getting a far worse deal than you’d expect, depending on market conditions. Even in the best of times, there are significant transaction costs when selling a house.
Even when your mortgage is cheaper than if you were renting, the costs of homeownership tend to outweigh the costs of renting. So, you must consider the costs of homeownership that most renters do not need to pay:
In some cases, where applicable, landlords can have their tenants pay some of these costs. But in the end, monthly expenses are higher while you’re still paying your mortgage.
Lastly, as an illiquid, stationary investment, buying a house isn’t a good financial decision for someone who cannot remain in close proximity. If you move often for work or any other reason, you can’t expect to buy and sell houses on a regular basis.
Oddly enough, there is a third option to the rent vs buy question: “rent to own”.
This sounds a lot like paying a mortgage, so what’s the difference?
A rent-to-own agreement is a deal a renter makes with their landlord. The renter commits to renting the property for a set amount of time. The renter has the option of choosing to purchase the home before the lease expires.
These rent-to-own agreements always include a standard lease agreement. The addition of the right to buy the property later is then added on top. You have the right to buy the property when/before the lease expires.
This should not be confused with a lease-purchase contract, which would actually require you to buy the property at the end of the lease.
Rent-to-own agreements all follow the above standards, but there can be minor differences between different agreements. For example, in some cases, a set percentage of your rent will be deducted from the purchase price of the home.
Also, your responsibilities while renting can vary. For example, some agreements hold the renter responsible for maintenance expenses even before they purchase the home.
Buying a house comes with tangible and intangible benefits that make it the superior option financially.
However, your life circumstances may make it unwise to take on the financial and physical responsibilities of homeownership. When thinking about renting vs. owning a home, it’s worth considering the long-term investment that buying a home is.
That includes the equity you build over time, as well as the many expenses that are not normally passed onto renters.
June 30, 2022