Friday, June 30, 2017

Why We Rent (vs. buying a home)

A home is an investment! You're just throwing your money away on a rental! Buying is always the better option to renting!

People who make these blanket statements that supposedly apply to everyone are just ignorant.

Argument 1: a mortgage builds equity!

A mortgage consists of principal, interest, taxes, and insurance.

How much of the mortgage is taken up by non-principal expenses?

Most of it. Especially during the first half of your mortgage.

So unless you are willing to stick it out in your home more than half of your mortgage, you are not going to have a lot to show for all those payment.

Argument 2: a home is an investment!

There are a few issues with this argument. The first is that a home can often be a money pit. Anytime something needs to be replaced (the roof, hot water heater, a deck in the back, etc.), a homeowner shells out thousands of dollars to basically keep his house exactly the same as it was before. Just one repair could wipe out any "savings on rent" or "equity" you got that year.

Homes also eat up your time. Mowing the lawn, fertilizing once or twice a year, power washing the driveway, repainting the walls every 10 years, changing out the AC vents, repairing a broken faucet. Simply maintaining a home is a huge time suck. What other investment (other than perhaps a business) takes up this amount of time and sweat?

Finally, homes historically keep up with the cost of inflation. So you can tie up thousands of dollars in a down payment and in mortgage payments just to keep up with inflation. Every once in a while there is a bubble, so if you sell at the height of the bubble you might make some extra dough above inflation. But historically, you're keeping up with inflation.

The number one reason to rent: freedom.

Laying all these arguments aside about the nickels and dimes of renting versus buying, the number one reason to rent is the freedom.

Freedom from being tied down to one place. If you decide you want to move, the most you will have to pay is a fee to break your lease early.

Freedom from home maintenance. You don't have to spend nearly as much time worrying about the maintenance of your home if you are renting. Something is broken in the middle of the night on a holiday weekend? Call the landlord or property management company.

Freedom from tying your money down. You can take the thousands you would have spent on a down payment and on maintenance costs and invest that money elsewhere that makes a return greater than just inflation costs.

Freedom from worrying so much about your job. If you have tens of thousands of dollars tied up in your home, it is your biggest "asset" *cough liability cough*. You have basically tied yourself to your job and geographic location. Can you sell the house? Sure. But if you lose your job or want to change jobs when the market isn't in your favor, all of that "investment" in your home could turn into a loss. Plus, if an incredible job presents itself but you have to move cross-country, it's a lot easier to leave your rental than your mortgage.

The bottom line: there is an opportunity cost to buying and there is an opportunity cost to renting. Either you are tying up your money in a low-performing asset or you are "throwing your money away" to the landlord each month.

In either scenario, both the buyer and the renter should invest. The buyer is not going to make huge returns on his home, especially selling before the halfway point of his mortgage. But the renter won't make any tangible returns on the money he spent on rent.

It's silly to say that everyone should buy or everyone should rent.

Everyone should weigh their options. Crunch the numbers. Look at the opportunity costs of both (and that doesn't just mean the money!).

My husband and I continue to rent despite many people telling us we are "throwing money away". We don't know where we will be working and living long-term. The market we are in is a seller's market right now meaning it's hard to find a deal. We have other things we are paying for so we don't want to tie up what savings we have in a down payment. And even if we did put a down payment on a home, we wouldn't have any savings left for repairs and maintenance meaning that even one minor repair could put us into debt (which we want to avoid). We're simply not ready. And that's okay! If the right time and the right home in the right location comes along, we will eventually buy. It's not an either/or. We will not necessarily be forever renting. There are homes everywhere so when the renter wants to become the buyer, there will be homes out there to buy.

What do you think?

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