Real Estate Advice

Should you own your own home, or keep renting one? This is a really, really tough question. It is also highly debated. This may be among the most controversial topics in real estate. Most people go ahead and assume that if you’re able to “pull it off,” that you should own your own house.

If you’re going to buy a house, you better be able to afford more than just the purchase price of the house. That’s a fact. This article is going to provide you with a great outlook on the rent or own topic. People make renting sound like it’s a drag, but they aren’t aware of the challenges and costs that come with purchasing. Many people who purchase will come to miss the days of a lease, and the landlord coming to fix any problems. Renting can be the absolute best way to go in many cases.

So, do you rent, or do you own?

Financially, it works out better to rent rather than to own. This is a controversial statement that spikes a lot of backlash from people. Whether or not you agree with that statement is going to be directly related to your own personal perspectives. As mentioned above, renting is most often better than owning.

Renting means you’ve got a fixed cost: Why is that? Well, lets assume that you have a standard rental lease. You know what you’re going to be paying each and every month. When you own, what you pay every month is uncertain. It could be different next month than it was this month. Just the A/C going out can cost you a few hundred bucks. Many problems that go wrong within a house can happen instantaneously. Sometimes there is no warning. Something is always happening when you own a home; it’s just part of it. When you’re on a lease, you don’t have to worry about any of that. The landlord comes to fix something if it breaks.

You’ll never spend money on renovations: When you rent, there’s no temptation to make improvements. You don’t sit on the sofa, staring into the open kitchen, wondering what it would look like if you re-did the cabinets. When you own it, you want to fix or re-design things. And the urge comes on suddenly. You decide to re-design the kitchen cabinets and the next thing you know you’re at Sears picking out new appliances. Before you know it, you’re in credit card debt or taking out a mortgage to renovate the bathroom. It happens so quickly. When you rent, this doesn’t happen. There’s no temptation because you’re not allowed to do that, and likely won’t live there long enough anyway to care.

Take the wool off of your eyes: If you want to live in a really nice area, your rent is probably going to be higher. This is where people argue that they’re basically paying their mortgage, and should therefore own instead rather than throw the money away to a landlord. They argue that the rent is so much higher because the house was more expensive. That is not always true, and most of the time it isn’t. If you’re renting a decent house in a pretty decent area, keep in mind that the owner is probably not making their living off of real estate investment.

There are times where a homeowner becomes a landlord by complete accident. Perhaps they really wanted to sell the house but couldn’t, so they were forced to either rent or keep up two mortgages. They might have been asking way too much for it, and it stayed on the market too long and wouldn’t sell. There’s also the possibility that they inherited the house and are just leasing it out until they figure out what they want to do with it.

You might be out of pocket short-term, but not by 20%: When you rent, yes you do have to put down first and sometimes the last month’s rental money. However if you buy, you’re going to have to put down 5-20% of the total cost of the home, depending on what mortgage you get. Typically, you put down 20% assuming you have a decent credit history (and other factors). If you put down any lower than that, it’s because you got a non-conventional loan which has a higher interest rate. Again, in some situation it does cost more to rent than to own. You’re going to have to do the math work on your own. But be sure you’re factoring in the cost to maintain the house, and pay for all of the unexpected expenses.

When you purchase a house, you don’t get the down payment back. You get your money’s worth out of your rental “deposit,” regarding first and last month’s rent. And, if you’re a good tenant (and have an ethical landlord, which most do not), you’ll get your deposit back at the end of the lease term.

You aren’t committed for longer than a year: When you rent, you’re not committed. Yes, leases are usually at least a year. If that sounds like a commitment, wait until you purchase a home. A one year lease will seem like a day. Many tenants do not like the fact that leases are “a whole year.” In the grand scheme of things, a year is a drop in the bucket. If you buy a house, you’ll probably get sick of it after the first year. The difference is that you can move if you grow tired of your rental after a year or two. Try doing that with a house. Oh, except you can’t.

Owning a house is a big commitment. It will become the priority in your life.  A mortgage is not a joke. Buying a house is a heck of a lot easier than selling it. Ask anyone who’s bought a house and had to move right after they bought it. Many young people will decide to buy a house before they are anywhere near settled in their lives. They just started out in their profession, so they don’t even know if that’s what they want to do long-term. They’re single. What usually happens is they’ll buy a house, get into a relationship, get a new job, and their whole life changes.

That means their housing situation does as well. As mentioned time and time again, you’ll want to live in the house for at least five years. If you buy a small one bedroom house when you’re single at 28…do you think you’ll still be at your same job without a family at 33? That’s five years. You’ve got to think about it that way. Many buyers are seeking instant gratification. Some people will actually go out and buy a house to feel better. It’s insane, but it happens. Some people buy clothes, other people buy real estate. It’s shocking. If you purchase a house and either want or need to move, you have two options. One is sell it, the other is rent it. Neither are easy. No matter which one you do, you’re going to have to cover costs.

Costs: What are these “costs?” Well, selling a house costs money. There are costs to purchase and to sell a house. They can seriously add up to a lot of money. First off, when you purchase a property you’ve got to pay closing costs that are way higher than what you bought it for. At times, you can get a seller to cover these, but it will usually even out in other ways, so you really aren’t “winning.” Also, your closing costs typically are higher when you purchase than when you sell. You’ve got to pay recording taxes, title insurance, and so on.

It will take a while to have your debt actually go to your debt: A very small amount of what you’ll spend the first couple of years owning the house will go toward the mortgage. After a couple of years, it starts to become worth the ownership. But that takes a few years. And we’re talking a few hundred bucks a month.

You can deduct interest: A popular argument for home ownership is that a house is tax deductible. This is a nice argument; the forgotten issue is that the interest of a home rises each year. So that big tax break you think you’re getting, you’re essentially still paying. With the rate that interests are rising, you’ll end up spending using that deduction on the interest; usually, even more.

So, is it better in the long run to rent or to buy? 

It’s just about always a better idea to rent. Data shows that most people only remain in their mortgage for three years; the typical homeowner only stays in their home for five of those. You’ve got to own that house for at least four years just to break even on what you spent from all the transaction expenses. Just about every person moves or transfers within that five years.

What you should know about rental income: Many people decide to purchase a property with more than one unit with the intent to live in one unit, and rent the other out. Yes, this is a wonderful idea at first. Most people end up changing their mind for a couple of reasons. One is that if you live in the property and are also a landlord, it’s far too easy to get too comfortable with the tenants. New thing you know, they’re acting like they own the place. Parties are being thrown, you hear the floors rattling from downstairs. The stories are endless. Not often does this work out.

What you should know about penalties: There is another (potential) benefit to owning a house rather than renting it. This depends on what you consider a benefit. That is that the bank can’t throw you out after a month or three months if you don’t pay your “rent,” i.e. mortgage. It can take them around half a year to multiple years to be able to get you out of the house.

It will also depend on how quick the foreclosing attorney is. Some take their sweet time, while others act fast. Even though you can get away with it for a little while, you’re credit is going to be completely ruined. And then you’ll end up in a rental anyway, if you can find somebody to rent to you.

Final tips for anyone thinking about owning a house:

When thinking about purchasing a home, you’ve got to think past that five years. Owning is permanent. Even if you rent it out, renting is not a sure bet. Not only will you likely lose money during the lease, but you’re going to go through months where it sits unoccupied. It can be hard to find a tenant. Sometimes, you’ll even have to drop the price just because you’re desperate for any income. Yes, you might have more stability when you own your own home, but what you’ve also got a permanent commitment.

Most people who decide they want to buy a house want to find the best deal. The best deals do not get you the best house. Usually, the buyer is settling. They buy a house with fewer bedrooms than they needed, they sacrificed a big kitchen for a small bathroom. They end up regretting the purchase and selling it before that five years. What usually happens is that they lose money on that house, and end up later on buying what they originally wanted anyway. Might as well have thrown a few hundred thousand dollars out of the window. They end up paying what they should have from the beginning, only they’ve lost a whole lot of money throughout the process from beginning to end. Don’t let this be you! It’s far too avoidable. Obviously there are situations that can come up way later in life that force you to move, but don’t buy a house when you aren’t settled into your life yet. Actually…even when you are, renting is still probably better.