Every time I stick up for tenants, I get a lot of flack from homeowners. Sometimes renters look at me funny too. Go figure.
That’s probably because one of the “undeniable” truths we are often told is that it is always better to own a home than to rent an apartment. By the way, you should be very careful when you say words like “always” and “never”, because sometimes…sometimes…I might just call you on it.
The “logic” behind this advice is that “when you own a home, you are always (or often) building equity, when you rent, all you’re only ever left with are receipts”.
Unfortunately, the answer can never be a simple yes or no because it largely depends on the context in which the advice is being given. There is never, and can never be, a blanket answer that will be right for every individual because each individual’s life is different, the housing market varies slightly across the country (not to mention the world), and each individual must weigh the pros and cons of their unique situation.
For example, let’s assume that an individual is renting an apartment for $600 per month. This rent includes gas (heat), and electric is extra (by the way, I’ve had such an arrangement before). The additional expense of electric is about $80 per month. So, this individual’s total “household expenses” amount to roughly $680.
He is advised to “buy a home” because “it’s better to own than to rent”. But, after researching whether or not this is actually true, he discovers that this is in fact not the best move for him right now.
Firstly, most of the homes in his area (or the area where he would like to live) sell for roughly $100,000. At 6%, his mortgage payment is about the same as his current rent. However, he must also pay for home owner’s insurance ($35 per month), and now he is responsible for paying for his natural gas/heat also (let’s be conservative at an additional cost of $100 per month). He must also pay for taxes, which he hadn’t had to do before ($125 per month), and regular maintenance for the house (mowing the lawn in the summer, shoveling snow in the winter).
At a bare minimum, it will cost him an extra $260 every month to own a home. But, what about the equity that his house is building? And what about a mortgage interest tax deduction and other itemized deductions? That could affect whether or not owning or renting is a smart move right now.
For a moment, let’s assume that he takes a standard deduction on his taxes instead of itemizing. If his home appreciates an average of 3-4% a year, this gain is offset by the additional $260 he must pay over renting. If he continues to rent, he can simply save that $260 every month, or invest it, or do both. If his home appreciates more than that, he can realize a gain, perhaps. But at 6% interest, we must also figure in the true cost of the home (on top of the $260 per month “extra” cost over renting) and whether the home will appreciate faster than the interest he is paying on the mortgage.
Will he mortgage the home just one time? Or will he refinance to pull out more equity over time to do the necessary repairs that a home requires? Remember, electrical wires fray, furnaces break, plumbing leaks, roofs sag. Even if we don’t figure in any repairs, the interest on the original mortgage alone amounts to $116,000 over the life of the loan, or $3,866 per year (average over 30 years). When we add the $260 per month extra over renting ($3,120) to the $3,800 in interest per year, we have a total of roughly $7,000 to overcome for the house to be more profitable than renting. This means our home must consistently appreciate faster than 7% a year every year.
Is that plausible? If itemizing tax deductions makes the cost of a home decrease, he may only need his home to appreciate at 3% or 4% for home ownership to be more profitable than renting. But, if that appreciation is not plausible (due to a declining housing market or an unrealistic necessary rate of appreciation), then is owning a home “always” better than renting? The real answer would appear to be…no.
You really need to give some serious thought and consideration to this issue before making the decision to buy a home. The best advice is to never blindly accept what others tell you is best for you. Investigate. Analyze your situation. Trust your own judgment.
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This entry was posted on December 4th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Budgeting & Money Management, Investing