Are You Losing Money by Renting?

Are you on the fence between renting or buying a home? There is a common misconception that renting is only for those that cannot afford to buy a home. While owning a home is becoming a luxury in certain parts of the world, many wealthy people choose to rent as an alternative to owning a home. Elon Musk is selling all of his property so that he can rent instead of own.

There are foundational question you should ask before choosing which option works best for your lifestyle. These are some pros and cons for each scenario. 

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PROS

• Flexibility

• Less Responsibility

• Community amenities 

This is the biggest one of the biggest advantages compared to home ownership. You are only obligated to the terms of your lease. If you need to move for any reason (job, family, etc.) it is very easy to make arrangements. Not being tied to one place is a great benefit that allows you to explore more opportunities and potentially take on more risks than home ownership.

Less Responsibility

If something breaks, you simply call maintenance to come and fix it. This is can be much cheaper and less stressful than the maintenance and repairs that come with owning a home. HOA Fees, home repairs, home insurance, and taxes all come with home ownership and add up very quickly. Being a renter makes you free of this responsibility

Community amenities

Living in a community with amenities is a nice benefit. While this obviously factored into your rent, but it is nice to have and the savings add up. If your complex has a gym you may not have to pay for a membership. Need to get work done at home but can’t concentrate?  See if your community has an office space for tenants. Want to throw a party? Many communities have outdoor and indoor spaces that are available to use.

CONS

• Rent Rates

• Eviction

• Neighbors

• Property Management

Rent Rates

When you are a renter, your rent price is at the discretion of your landlord. Unless you have a long lease, you should anticipate your rent going up every year to account for inflation. Consider these factors when determining how long you plan to rent. Also be aware of what your rent. Do you have to pay extra for your pet, parking, laundry, appliances, cable, utilities, etc.? Be sure to shop around to make sure you are getting the best rate possible.

Eviction

Understand what grounds a landlord has to evict a tenant. If your residence goes under new management or new ownership, it is possible for the unit to create new guidelines and procedures. Know the laws based on the state you live in. Are the laws more in favor of tenants or landlords? Places like New York and California have more protection laws for tenants. Also, be aware of how much time a landlord is required to give you prior to requiring you to evacuate.

Neighbors

Having bad neighbors can be a nightmare. If you live in an apartment it is important to be aware of things that may cause disturbances. Is there carpet in the living spaces? Hard wood floors can be beautiful but terrible to listen to over your head. What is the age demographic of the community? If it is near a university you may have noisy neighbors that party and play loud music all the time. Does the building allow pets or smoking? If you have allergies or are sensitive to smells this is something to take into consideration. I would also encourage you to look at reviews to see how management deals with complaints regarding neighbors that do not follow community guidelines.

Property Management

Not all property managers are created equal and this can make or break your experience as a tenant. Be sure to read reviews about the properties you are interested in and the management team itself. How do they maintain the property? Are they polite when you talk to them on the phone? How quickly are maintenance issues addressed? These are all important things to take into consideration.

PROS

• Stability

• Home appreciation

• Fixed payments

• More living space

• Privacy

• Control over your space

Stability

If you have a family, you may want to have a place that you can call your own. Your priority is probably being in a good school districts, a neighborhood that can give your children the best quality of life and owning a home may be the best option for you. Or if you are simply looking for your forever home, settling, finding a home to make your own for the next 30 years is very rewarding.

Home appreciation

The value in owning a home has more to do with home appreciation than paying down your mortgage. For example, if you buy a home for $300,000 and in 10 years it is worth $500,000 that is $200,000 in equity added to your net worth. This is how wealth is created. It will take years for you to start making a dent in the principle of your mortgage due to upfront interest. The benefit of having a 30-year fixed loan is cash flow you have by not having a large mortgage payment. By having a 30-year low interest loan, you will have the ability to have living expenses at a fixed income while having the cash flow to invest in assets that will give you a higher return. Paying down your mortgage early does you no favors. Remember that!

Fixed payments

Not having to worry about rising housing expenses is a huge benefit to home ownership. While insurance, childcare, food, and other mandatory expenses go up, not having to factor an increase in housing expenses into your annual budget provides peace of mind. Also, having a fixed cost for hosing allows you to do long-term planning much more effectively.

More living space

This is moreso the case if you are renting an apartment. If you are able to save for a healthy down payment, you can purchase a home that may be twice the amount of space that you could have in an apartment. The increase in the quality of life simply cannot be overlooked. Having a back yard, being able to entertain large groups of people, and having more space for a family is a huge benefit of owning a home.

Privacy

Since you own your home, you can dictate who comes in and when. When you live in an apartment, they may need or demand access to your home for maintenance, emergencies, or to see how you keep the place. It can feel incredibly invasive to know that people are in your home when you are not around. This is why I use Nest in my home. Having Nest allows me to be aware of anyone that is in my place. I will receive a notification from my phone and an image/video of any sound or movement.

Control over your space

You have the ability to decorate, add and remove anything you like when you own your own home. If you want to knock out a wall to make the space more open, you can do that. If you want to paint your kitchen green, you can do that too. Being able to have creative control and completely make a place your own is very rewarding.

CONS

• HOA costs

• Interest payments

• Large upfront investment

• Illiquidity

• Maintenance

HOA costs

Living in a residential community requires upkeep and that cost is passed on to the home owners. If you decide to live in a community that has a Home Owner’s Association (HOA) than you are obligated to pay the fee and abide by the rules of the community. Rules vary from how your lawn is to be kept, architectural changes to your home, guidelines for fences and paved driveways, and much more. The purpose is to maintain the quality of the neighborhood. It is important to be respectful of your neighbors and factor in the HOA costs into your budget. In many places the HOA fees can be raised at any time, so educate yourself on the community before purchasing a home. If you are moving into an established neighborhood you may not run into raised cost as much but if it is a new build community where certain amenities are being rolled out and the amount of neighbors are low, the risk of HOA fees changing is something to take into consideration.

Interest payments

In the beginning of your mortgage, you will be paying more in interest than in principal. This is an argument for if you are truly benefiting financially by owning a home. Many people used the interest as a tax write off in the past but the tax laws have changed, and it is very difficult for people to meet this threshold now.

Large upfront investment

It is a huge commitment saving up for a down payment on a home. There is opportunity cost on investing your funds elsewhere or even spending it on experiences. If you are committed to owning a home, you will not regret saving up for a healthy down payment.

Illiquidity

If you try to sell prior to 5 years of owning your home, you may lose money based on how the loan is amortized. Depending on your market, it might take a while to sell your home. This is different than other assets like stocks or bonds that can easily be liquidated. Owning a home may also make you feel obligated to stay in a certain location for longer than you would like.

Maintenance

The age of your home and the upkeep from prior owners will determine how much additional maintenance you will be required to do on your home. These costs can add up fast. As a rule of thumb, you should have some money saved for these types of expenses. Just like you have car maintenance, there is home maintenance. Allocate a bit each month so that you aren’t blindsided when something comes up that needs fixing.

After reading the pros and cons to renting, which scenario works best for you? Let us know in the comments!