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Renting vs. Buying: Why renting isn't just "throwing money away"

Updated on November 7, 2008
Are you throwing your rent money down the toilet each month?   Photo Credit: Kevin Rosseel
Are you throwing your rent money down the toilet each month? Photo Credit: Kevin Rosseel

Renting Vs. Buying: Home Ownership isn't always the best choice

Chances are that at some point in your life, you've heard someone say, "Renting is just like throwing your money away!" In this school of thought, renting is a poor financial decision, because your monthly housing costs are not contributing to a build-up of equity. The people who throw this phrase around see a home as an investment, and renting as a black hole for your hard-earned money. For them, the American Dream is owning your own little patch of green with a white picket fence.

However, in reality, choosing home ownership over renting is not always the best choice. For some, the dictates of lifestyle, financial considerations, and the housing market make renting a preferable option. Moreover, overly enthusiastic proponents of purchasing property sometimes forget to take into account the hidden costs of home ownership. While owning a home can be a great investment, it is one that should be entered into with a full understanding of the pros and cons, the extra expenses, and reasons why, in some cases, renting is actually a better option.  

The hidden costs of home ownership

Depending on the housing market, it's possible to find a home with principal and interest payments lower than what you'd pay in rent. However, with a home, you'll also have to pay taxes and insurance. These additional payments can add up to thousands of dollars. This money isn't being ‘thrown away;' it serves a purpose. All the same, it's not going towards building equity. When you rent, you won't have to worry about taxes, and you won't be responsible for insuring the premises you occupy. Any insurance you pay on your belongings will be a fraction of what you'd pay for homeowner's insurance.

Another important consideration is the amortization schedule on a mortgage. Your ‘principal and interest' payments will be heavily skewed towards ‘interest.' For instance, if you took out a 30-year loan for the amount of $150,000 at an interest rate of 6.75%, your monthly principal and interest payment would be $972.90. Of that nearly $1000 monthly payment (and remember, that doesn't include taxes and insurance), you won't see $200 going towards principal until your 79th payment- that's six and a half years into your mortgage. And all that money going towards interest isn't working any harder for you than if you'd spent it on rent.

The decision to buy a home needs to also take into account the costs of maintenance. When you're renting, if the water heater leaks or the AC freezes up, you just put in a work order and wait for the problem to be fixed. When you own your own home, you're going to need the cash on hand to pay for parts and labor. And while a simple service call every once in a while might not put you out, you need to be prepared for the worst: what if your roof needs to be replaced? What if there's a major water leak in your home? What if a major appliance stops functioning and needs to be replaced? Will you have hundreds, or even thousands of dollars to complete these crucial repairs? Experts recommend that you budget at least 1% of the selling price of your home towards yearly maintenance costs. These are expenses that you wouldn't need to worry about if you were renting.

There's also an upfront cost to home ownership: even if you qualify for a 100% financing loan with no down payment, you'll still see as much as several thousand dollars in closing costs at you time of purchase. None of this money will be applied to your home's equity, so it won't be doing you any better than your monthly rent.

 

Gathering moss: home ownership ties you down

Another crucial consideration in the decision to buy versus rent is the amount of time you can commit to one place. You need to ask yourself the following questions:

• What the chances that I'll be transferred unexpectedly?

• Is there any foreseeable chance that family events might occur that would necessitate a move in the near future (for instance, an ailing relative you may want to move closer to, or the birth of a niece/nephew/grandchild that might tempt you to move closer to family)?

• Will this home be able to fit your needs, not only at the time of purchase, but also for years in the future?

• Will I be able to stand living here if my neighbors have loud parties at night, or I start noticing graffiti around the neighborhood, or there's a rash of car break ins on the block?

Home ownership is a great way to put down roots; however, the flip side of having roots is, well, that you are rooted! While you can pick up and move at the end of a lease with no consequences, there's a lot less flexibility with a home. To move, you'll need to find buyers or renters, processes that can sometimes take many months. If you need to move quickly, you may find yourself paying both a mortgage in your old home, and rent or a second mortgage at the same time while you try to sell or rent your home. If you don't have a significant cushion of savings, this situation could be financially devastating.

Another, very important reason why home ownership ties you down is that the cost of selling a home that you've occupied for less than a few years can be substantial. As the seller, you'll be responsible for paying a total of 6% of the selling price in commission to the buying and selling agents. You can expect an additional 2-3% extra in miscellaneous closing costs as well. So if your home hasn't appreciated in value by at least 9% (which it's not likely to do in less than a few years, particularly now that the housing bubble has deflated) you'll be looking at a loss on your ‘investment.'

The American Dream- or is it? Photo Credit: jdurham
The American Dream- or is it? Photo Credit: jdurham

Money invested in real estate is relatively non-liquid

The liquidity of an asset refers to how easily money can be accessed from it. Checking and savings accounts, obviously, are as liquid as you can get, since funds are easily accessed through a withdrawal. Stocks and matured bonds are considered fairly liquid because they can be sold or cashed with a minimum of difficulty and turnaround time. Real estate, on the other hand, is considered illiquid. The money you have invested in your home's equity, while certainly an asset, can't be easily accessed in case of an emergency. So, if you invest the bulk of your savings in a down payment on your home, you could find yourself in severe straits when an unexpected emergency comes around and you haven't got any liquid funds to access. 

To rent or to buy: a final word

In this article, I've tried to present a compelling argument for why buying isn't always a better choice than renting. That being said, however, there are many situations where buying a home is a sound investment. It's important that as an individual or couple, you consider all the aspects of your financial situation, without being influenced by peer pressure or making a hasty decision. For some people, paying rent is not a waste of money: it's a sound financial decision.  

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    • profile image

      Guanta 

      7 years ago

      Thank you Sarah, very informative. I live in an apartment (grew up in a house) and I'm always thinking about buying a house. I think you've helped me see that I want to buy a house for emotional comfort, which might be too costly for me to handle. Thank you much.

    • profile image

      somebody 

      7 years ago

      This is all well and good but at the end of the day, buying means your saving SOMETHING, renting means, your saving NOTHING, no getting away from the fact, admittedly more and more people in the western world simply cant afford to buy a home, this doesn't change the fact that owning something is better than being a tenant, what kind of society can't even provide its people with a little patch of land or least an apartment or something, that people can't afford a home, and their bit of green and picket fence in a stinking rich country built on a continent is an indictment of the USA's failure as a society. A nation of landlords and tenants and the american dream are mutually exclusive. Ownership.means liberty.

    • kazemaru2 profile image

      kazemaru2 

      7 years ago from usa

      Nice insight into the housing market and how people use their mortgages as their primary asset. Coming from my perspective of being in a family with two homes and me currently living in an apartment it makes me rethink where my money goes.

    • Sarah Guy profile imageAUTHOR

      Sarah Guy 

      9 years ago from San Antonio, TX

      Thanks for the positive comment! : ) You make a great point as well. I think that while buying a home can be the right choice for many people, there's also a whole glut of people out there being misled by 'popular opinion' that home ownership is always the preferred option. Just look at all the people who are now defaulting on their mortgages- regardless of who's at fault (the buyers, the lenders, or both)- if those folks had all rented instead, maybe we wouldn't be in such a credit crunch right now!

    • johngriggs profile image

      johngriggs 

      9 years ago from Scottsdale, Arizona

      Great post! Buying a home is overrated. Until a house is paid for, you don't really "own" it anyway. The bank does. Also, even if you do manage to sell a home for more than you paid for it, those gains are almost always negated by inflation and the interest that was paid.

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