Dollars & Sense
There is one Personal Finance question that comes up all the time…
“IS IT CHEAPER TO RENT THAN TO OWN A HOME?”
The ANSWER: It depends… There are several factors to consider when you are ask this question.
Here are the advantages of Renting a Home:
· Renters are only financially committed to the term of their lease or rental agreement. When you sign a 3 year lease, you are only obligated to make rental payments for a three year period.
· Renters enjoy the flexibility and ease of moving into and out of places to live especially if they want to “test” a new neighborhood, try different schools or simply have the desire live in a different community. If you dislike the neighborhood or the schools, you can simply move to another location that is more to your liking. People in the military that get moved around also are good candidates for renting in the shorter term.
· As we all know about properties is that they need regular maintenance and repairs. Renters do not have to pay for the costs of repairs and maintenance. If the heat or A/C breaks down, they call the landlord to fix it. If the hot water heater goes down, you call the landlord.
Here are the disadvantages of Renting a Home:
· Rent costs seem to be always going up year over year. You have little control over controlling the costs of rent increases, cost of living or other factors that the landlord builds into the cost of a rental such as property taxes.
· Some rentals will not allow you to have pets while others may not allow smoking on the property.
Furthermore, landlords often require upfront money for cleaning deposits, pet deposits and first and last month’s rental payments. This is cash that you need to come up with that you may or may not get back when you leave. Something to consider when entering into a rental agreement.
· Renters cannot deduct mortgage interest and property taxes on their personal taxes.
· Rental agreements can have tacit renewals for an additional year or two on a lease agreement. They can be auto-renewed. In addition, most rental agreements require that tenants need to provide advance notice of termination if they intend to move out. Obviously, if you do not pay the rent, landlords can legally have you removed from the property and will lock you out of the property.
· There are often late fees for past due rent and legal fees associated with breaking a lease/rental contract. Make sure you are aware of what you are signing up for in the agreement.
· Costs for any physical destruction or damage to the property can be quite large. These often turn into difficult and complex legal matters.
Here are the advantages of Owning a Home:
· Homes have historically been one of the best long-term investment and wealth building tools as they have increased in value over time.
· Owners “build equity” over time. Each payment you make to the mortgage company is actually paying yourself slowly a bit at a time as you build the equity and pay down the debt.
· Owners can deduct mortgage interest and property taxes on their personal taxes which reduces your taxable income.
· Owners have the ability to keep their payments fixed and predictable if they have a fixed rate mortgage that renters do not have the ability to control. You know what you are going to pay next year with a mortgage. Renters are not so lucky.
· There is great pride in being an owner and long term member of the community
Here are the disadvantages of Owning a Home:
· The purchase of any home requires paying closing costs. Closing Costs can be anywhere from 1% to 3% of the total purchase price of the home. It will vary and it is important to research this when buying a home.
· Property Taxes: each owner has the obligation to pay property taxes on the home. these property taxes pay for important services like police and fire.
· Maintenance and Repairs are a part of home ownership. No matter what happens, you have to pay the expense of repairs to the carpeting, roof, pool, hot water heater, washer / dryer and of course the refrigerator.
· Homeowners Insurance: Home need to have homeowners insurance. This is especially true when the home has a mortgage on it. It will be required by the mortgage company to protect its investment from things like fire
· HOA Fees: If you decide to live in a neighborhood that has a homeowners association (HOA) you are obligated to pay to support the local HOA. They provide services for things like community standards and landscaping in common areas like parks.
· Selling Costs: When you buy a home you are likely to pay a 3% commission to a real estate agent. When you sell your home, you are also likely to pay that same 3% commission to a real estate agent. Understand the costs of buying and selling real estate. Keep in mind that commissions are often negotiable but 3% is the standard.
· Debt Service: People who buy a home typically buy with a mortgage and make payments towards the house. These payments include BOTH principle and interests portions. Because you borrowed money to buy the house, there is a chance that if you fail to make your monthly payments, a bank can foreclose on you and take the home away. 100% of the foreclosures happen to people that have debt on their home.
· Homes are more likely to cost you money in the short term than in the long term. In the Phoenix market, on average the break-even point is about 4.5 to 5 years between renting and buying. Remember when you are the owner of a home, those repairs to the home are at your cost.
In conclusion, in the short-term (1-4 years), rent is usually cheaper than owning a home. Monthly cash flow is almost ALWAYS cheaper for the renter. Furthermore, renting is simply easier to do. The downside is that renting will never build equity.
Ultimately home ownership is the preferred method to building long term wealth, but it comes at the cost of short term cash flow woes. When faced with this question, consider these items and you will almost always make the right decision. It is simply “money wise”.