Renting vs. Buying: Can Renters Still Build Wealth?
For years, we’ve heard that renting is “throwing money away” and that homeownership is key to building wealth. But with home prices soaring, many people find renting makes more financial sense than trying to purchase.
And, while it’s true that owning can help you build equity, renting comes with its own benefits. This includes the potential to help you save more money in the long run.
So, how can this be? In this post, we’ll review various scenarios where renting may be a better financial decision than buying a home.
The Paradigms of Wealth Building
The first thing to understand is that renting and buying are two different paradigms for wealth building. When you buy a home, you’re investing in an asset that will (hopefully) gradually appreciate in value over time. While there are many expenses that go into buying and maintaining a home, the hope is that your investment will grow, and you’ll eventually make a profit when you sell.
On the other hand, renting doesn’t involve buying an asset. Instead, it’s more like paying for a service. You’re essentially just paying someone else to live in their home. There’s no ownership involved, no equity-building, and you’re essentially paying for their mortgage and other costs.
Of course, this doesn’t mean that renting can’t help you build wealth. It just means that it works in a different way.
Renting vs. Buying: The Math
Now let’s look at some numbers to see if renting vs. buying could actually save you money.
First, let’s assume you’re looking at a home that costs $250,000. You make a down payment of $50,000 or 20%, so your loan amount is $200,000.
Your interest rate is 6% and you’re looking at a 30-year term. Here’s what your monthly payments would look like:
- Mortgage Payment: $1199
- Property Taxes: $333
- Homeowners Insurance: $100
- Utilities: $300
Total Monthly Payment: $1,859, excluding repairs, maintenance, and other incidentals.
Now let’s say you’re renting a similar home for $1,500 per month. Here’s what your monthly expenses would look like:
- Rent: $1,300
- Utilities: $300
Total Monthly Expense: $1,800, excluding renters insurance and other incidentals.
In this scenario, it would actually be cheaper to rent than to buy. Sure, it is only a slight difference in the monthly cost of $59. But, over one year, that is a savings of $708.
Now, these numbers are slightly skewed and very generalized. Many landlords find ways to flip the tables so that they make a profit off of renting, and many homeowners make a killing when they sell their homes.
But, in general, the monthly cost of renting will be cheaper than the monthly cost of owning a home.
The Benefits of Renting
Now that we’ve looked at the numbers, let’s look at some of the other benefits of renting that may not be as obvious.
1. You’re not responsible for repairs or maintenance
Well, unless you’re the one who caused the damage. But, in general, one of the biggest costs of homeownership is repairs and maintenance. When something breaks, it’s on you to fix it. And, if you don’t have the money to do so, you’ll have to take out a loan or put it on a credit card, accruing interest along the way.
A new roof can run you $10,000 or more. A new furnace might set you back $3,000. And, if your septic system needs to be replaced, you could be looking at a bill for another $10,000 or more.
As a renter, you’re not responsible for these costs. If something breaks, it’s up to your landlord to fix it. If the roof needs replacing, it’s on them, not you. Of course, they may try to pass the cost on to you in the form of higher rent, but ultimately it’s their responsibility.
2. You’re not responsible for property taxes or insurance
In some states, like Illinois, renters pay the property tax bill and it is baked into their rent by law. However, not all states explicitly pass this expense along to renters. And, if the property is vacant, the owner is still responsible.
Property taxes and insurance are two more expenses that can take a big bite out of your budget as a homeowner. However, you’re ultimately not responsible for these costs as a renter.
3. You have more flexibility
One of the biggest benefits of renting is that you have more flexibility. If you need to move for a new job or want to downsize now that the kids are out of the house, you can do so without having to go through the hassle and expense of selling your home.
4. You don’t have to worry about being underwater
If you own a home and the market crashes, you could find yourself “underwater.” This means you owe more on your mortgage than your home is worth.
This can make it difficult to sell your home and you may end up having to pay thousands of dollars out of pocket to get out from under the mortgage.
As a renter, you don’t have to worry about this. If the market crashes and your rent increases, you can move elsewhere.
5. You don’t have to worry about a big upfront cost
When you buy a home, there are a lot of upfront costs that you have to pay in addition to your down payment. These include things like closing and other hidden costs of buying a home, which can run several thousand dollars, as well as the cost of furnishing and decorating your new home.
As a renter, you don’t have to worry about these costs. You can move into your new place and start enjoying it right away.
The Benefits of Buying vs. Renting
As mentioned above, even though there are many advantages to renting, the advantages of buying vs. renting may be more appealing to you. These include:
1. Rentals aren’t always easy to find
One of the biggest reason against renting right now is the lack of rental properties. WIth a lot of people struggling to find homes to purchase, many are turning to renting and that is eating up the rental inventory.
This can make so of the positives of renting a negative. For example, if your landlord raises your rent and you can’t find anywhere else to live, you must pay the higher rent. When you own, your mortgage is locked in so you don’t have to worry about that.
2. You’re building equity
With each mortgage payment you make, you’re slowly building equity in your home. Equity is the portion of your home that you actually own outright.
So, if your home is worth $200,000 and you have a mortgage balance of $150,000, you have $50,000 in equity. You can cash out your equity through a HELOC (Home Equity Line of Credit) to have spare cash available for repairs and anything else. Making those repairs can also boost the value of the home, so you’re building equity even faster.
3. It’s a forced savings plan
Another advantage of buying vs renting is that it’s a forced savings plan. With each mortgage payment that you make, you’re slowly but surely paying down the principal balance on your loan.
And, as the years go by and you get closer to paying off the loan, the majority of your payment will go towards the principal, rather than interest.
4. You may be able to deduct the interest on your taxes
If you itemize your deductions, you may be able to deduct the interest that you pay on your mortgage from your taxes. This can save you a significant amount of money every year.
Over time, your home will likely appreciate in value. This means that it will be worth more when you sell it than it was when you bought it (assuming you maintain it and don’t make any major renovations that decrease the value).
The appreciation can provide a nice nest egg for you when you decide to sell your home and downsize or move to a new area.
6. You have more control
As a homeowner, you have much more control over your living situation than you do as a renter. For example, if you want to paint the walls or make any other changes to the property, you can do so without having to get permission from your landlord.
Additionally, if you have a problem with a noisy neighbor or anything else, you can simply call the police or take other action to resolve the issue without having to go through your landlord.
7. It’s a good investment
While there’s no guarantee that your home will appreciate in value, it’s generally a good investment. And, even if the value of your home value doesn’t go up, you’re still building equity with each mortgage payment that you make.
8. You can rent it out
If you ever find yourself in a situation where you can’t afford to keep your home, you can always rent it out to cover the mortgage payments. This can provide you with a nice safety net and ensure that you don’t lose your investment.
9. It is an asset you can borrow against
If you ever find yourself in a financial bind, you can always take out a loan against the equity in your home. This can provide you with the money that you need to cover unexpected expenses or make ends meet until you get back on your feet.
10. You’re not throwing your money away
When you rent, all of the money that you’re paying each month is simply going into your landlord’s pocket. When you own your home, you’re investing in an asset that you can eventually sell for a profit.
11. You have more privacy
As a homeowner, you’ll have much more privacy than you would as a renter. You won’t have to worry about nosy neighbors or landlords coming into your home whenever they please.
Summing It Up
The benefits of renting vs. buying is a big decision that has many factors to consider based on your personal situation, goals, and needs. Ultimately, the choice comes down to what’s best for you and your family.
If you’re looking for long-term investment and you’re prepared to maintain the property, then buying a home may be the right choice for you. However, if you’re not ready to commit to property or you don’t want the hassle of maintenance, renting may be the better option.
Whichever way you choose to go, make sure you do your research and understand all of the potential risks and rewards before making a final decision.
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