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Sandra Gilpatrick, CFP ®,CDFA™

One of my most popular FAQs: Renting vs. Owning

Should I continue to rent or look at buying a home? That is one of the top questions asked by my clients considering a primary residence. It is a great query because the answer is dependent on an individual’s particular circumstances and preferences; it’s not a one-size-fits-all answer.  For instance, one might prefer to have limitless decorating options in their living space while others may place more value in being relieved of the responsibility of home repairs. Do you have a tolerance for home maintenance, handiwork, and fixing repairs or will you have the time and money to hire a contractor?  If you find you are someone who needs and enjoys the convenience of someone else fixing repairs for you, then renting might be a good fit for you. The financial option between buying or renting a living space will become uncomplicated once you consider your values and what you appreciate most in your living space. To help with your decision-making process, there are some facts and ideas I recommend taking into consideration. 

    There are a multitude of personal circumstances and values that influence how cost-effective buying a home can be. For instance, the length of time you plan on living in a certain area can impact your decision to rent or buy. Traditionally, renting is considered more of a flexible and less permanent option rather than owning a home, which is more of a binding commitment.  If you find yourself leaning towards a more long-term living situation, it may be financially advantageous to own a home rather than rent as this will allow for asset appreciation. If you bought the right property in the right location, you could be handsomely rewarded. However, unless you expect to sell your property (downsizing) you will not be able to realize your full asset appreciation if you are still living in that property.

    The most common reason to buy a house is that doing so could be a wise investment for the future. In recent years, homeownership generally has emerged as a rewarding investment. Further, it can be said that homeowners are—in some ways—implicitly earning by avoiding paying rent. Because the government subsidizes homeowners through the tax code and with policies including tax deduction on mortgage interest, owner-occupiers are able to save in many financial respects.  Homeowners are not burdened by the possibility that a landlord will raise rent costs or sell a building. With all of this said in support of homeownership, it is also worth noting unique expenses that can occur like property tax increases or assessments on buildings. 

Understanding potential appreciation is a benefit of owning a home, but it is important to acknowledge the various financial benefits of renting as well. It is a common misconception that renting offers little investment for the future. Renters often devote a smaller share of their income to rent than homeowners contribute to repayments of mortgage interest.  Even if a homeowner is not paying off a mortgage, they encounter a whole host of expenses associated with maintenance that renters do not including home wear and tear as well as improvements.  It is reasonable for homeowners to spend about 1% of the cost of their property on maintenance each year.  So, if you buy a $600,000 property, you should plan on setting aside around $6,000 for maintenance alone annually. Homeowners face many hurdles in regards to spending and covering costs associated with wear and tear as well as mortgage repayments. The stresses of paying back a big mortgage and accounting for maintenance expenses are real. Allocating your income and a portion of your savings to these costs causes you to cut back in other areas of your budget—possibly forcing you to sacrifice other important items in your budget. While owning a home can, in some ways, be a great investment for the future, there is always the downside of having capital locked up in property, which could have the potential to produce a more liquid investment return if invested elsewhere. 

Also, if you are not certain of a location you’d like to put down roots or if you plan on moving in fewer than five years, hefty real estate transaction costs could tip renting in your favor. Real estate transactions can include title, attorney & realtors fees, appraisal, inspection and lender costs if you are borrowing funds. By renting a living space, you may be able to relieve some of the financial pressure on your budget and steer clear of some of the larger costs associated with buying a home.

Similar to owning a home, renting is not without its downfalls. One of the most pressing issues facing the rental sector is rent controls. Additionally, landlords can raise rent or sell buildings—forcing tenants to renew their lease at higher rates or to move out. Renting agreements often also limit your freedom to decorate or personalize your living space. If you rent, there is a good chance you will not be able to paint the walls or replace outdated flooring. For some, there is a strong emotional component to wanting to own their living space. Since American society has long-perpetuated the idea that owning is better, stigmas and prejudices associated with renting can potentially make one feel lesser, though this is certainly not the case.

After a careful analysis of both renting and owning a living space, it is clear that both avenues present financial benefits and drawbacks. Answering the question of whether renting or owning is fiscally better may not have been as easy as one might have suspected. It is important to remember that the answer is dependent on your lifestyle and the aspects of your living space that you value most. As life circumstances change, your priorities should be revisited. Take the time to ensure your spending aligns with your preferences and what makes you happiest and most comfortable.  I suggest looking at your overall financial plan to help evaluate decisions. If you are struggling with wondering if renting or owning makes sense for you, please contact me to discuss.