There is a great illusion when it comes to real estate. This illusion is that owning your home is an investment.
- When you own real estate and use it to generate monthly income…it is an investment.
- When you buy real estate and develop it to sell for a profit…it is an investment.
- When you buy real estate to live in…it not an investment. It is a personal expense.
Where did this idea come from that every American should own their home?
Actually it is possible that Fannie Mae came up with the “American Dream” idea as part of a marketing campaign that everyone should own their own home. Great idea on their part if they really did come up with it.
Should I Rent or Buy a Home?
Most people believe that owning a home should be considered an investment. Some go as far to become “house poor” so that they can leverage themselves into a bigger home. This does not seem wise.
There is also a social stigma to being an renter vs. an owner. If you are an owner, you are perceived as being more well off. But are you?
You need to know whether it is cheaper to rent or own in each U.S. city. It is not as clear cut as you might think. It is not always cheaper to own than rent. There are a number of variables to consider, many of which are not often discussed.
Regardless of whether you are looking to rent or buy a home then there are a number of factors that you should consider. Here are a few considerations to look at.
Pros and Cons of Whether to Rent or Own a Home
The best way to look at this question of whether to rent or buy a home, is to look at the positive aspects, negative aspects, figure out what is important to you, and then run the numbers to see which is the more financially responsible approach.
What are the positive aspects of buying a home?
- Sense of ownership: Most people who own their home appreciate the ability to do what they want to their home.
- Sense of accomplishment: Keeping up with the Joneses is subconsciously important to many people. Being a homeowner brings with it a level of cache and respect with your peers.
- Capital appreciation: Home prices have gone up substantially over the past 60+ years. They have been a great hedge against inflation.
- More choices: While it would be nice to think that you can find any home you want whether you are renting or buying, it just isn’t the case. There are more homes for sale than there are for rent when it comes to single family homes.
What are the negative aspects of buying a house?
- Illiquidity: A house is an illiquid asset. This means that if you want to sell it, it could take you a month or more than a year to sell it. If you have to relocate to another area, this can make it a bit of a challenge for you. You may even have to heavily discount your asking price to move it quickly.
- Prices don’t always go up: As we saw in 2007–2010, home prices don’t always go up. When you are buying an expensive asset with leverage, you better hope that prices continue to go up. Otherwise you might be “underwater” on your home equity.
- Large down payment: It will require a large down payment to buy a home. Not everyone has enough capital to put down a 20% down payment.
- Costs of ownership: While many people calculate the costs of ownership as mortgage payments, taxes, and insurance, they typically miss a few other items that can add up. Things such as: maintenance costs, landscaping, furnishings, HOA fees, and renovation costs. I will discuss these in the next post of this series.
- Being “house poor”: Many homeowners stretch financially to buy a house. This puts them in a dangerous position if their financial situation suddenly changes.
What are the positive aspects of renting a home?
- Mobility: You have the freedom to move anytime you want. While your lease agreement will dictate the terms of your moving out, if you need to relocate you can do it on a short notice.
- No maintenance costs: Owning a home costs money. The periodic maintenance can be expensive. The house may need to have a new exterior siding, new roof, other other expensive replacements. As a renter you will not be responsible for these costs.
- Monthly costs: While it will depend on where you live and how much the house costs, but in many cases it is cheaper to rent than to own.
- No down payment needed: Owning a home requires a down payment; renting does not.
What are the negative aspects of renting a home?
- Fewer choices: The choices are more narrow for renters.
- Inflexible ability to “make it yours”: Most landlords do not want the renters to do renovations. This can restrict your ability to fully enjoy your home or make it feel like it is yours.
- No capital appreciation: If you rent a home for 20 years you will miss out on the potential capital appreciation of the property. This is not a guarantee that appreciation will happen, but if history is a guide then you should consider this.
How Can You Decide?
The best way to decide is to consider each one of these above pros and cons of whether to own or rent a home. How important is it that you have a feeling of ownership, or to make changes to the house? Do you think the prices of real estate are going up or down? What will happen with inflation? These are important questions.