The Ultimate Debate Explained
For as long as you have been an adult, you have heard from numerous parties the debate on whether it is better to rent or is it better to buy/own a house. They may include a parent, family member, work colleague, mentor, etc… The different viewpoints are based on their own experiences and are mostly biased. In this article, I will provide facts by examining the pros and cons of each category to determine whether it is better, to rent or to buy.
Pros of Renting:
Flexibility. Rentals are flexible due to the length of the common residential lease. Most leases range from six months to a year. After the agreed upon lease agreement, typical renting scenarios continue to rent on a month-to-month basis with a 30-60 day advance notice if one of the parties is planning to change/move.
Care-Free. With rental agreements, the Landlord is liable for repairs to the property’s appliances and utilities of the house. These appliances and utilities include the roof, exterior structure, water heater, water softener, plumbing, etc… The renter is carefree due to the lack of financial responsibility to maintain or replace these systems, along with not having to fix any issues that may come up.
A big misunderstanding with care-free renting is people tend to believe that there are fewer responsibilities for them than they expect. For example, pest control is normally mandated for the tenants to pay/take care of. Some leases will also require the tenant to pay for or maintain the lawn and any snow removal. Renters are also responsible for their personal property. Rentals may need to be furnished by the tenant, including a washer and dryer, adding to the cost of renting.
Predictable expenses. Once you sign a lease, the renter and the landlord agree on what the monthly charge is for rent. Aside from paying some utility fees and renter’s insurance, your rent will not change throughout the contract. However, the rent could unexpectedly increase once the contract is over. Check to see if the rental is rent-controlled before signing the lease.
Cons of Renting:
Lack of control. With the signature of a lease, a tenant is agreeing to the rules and regulations of that lease. Those rules can be difficult if it includes a limit on noise, the number of individuals who can visit at one time, or other limitations set by the landlord. Although living “care-free” is nice, the landlord can be slow to respond to needed fixtures in the apartment or house. There are plenty of horror stories out there where an individual speaks of how a landlord did not respond to necessary repairs leading to housing issues along with landlord-tenant drama.
No Equity. The commonly told disadvantage of renting, not building equity in a home of their own. The rental payments are not going toward equity or toward payments, one could write off/deduct them from their taxes. Individuals, typically homeowners themselves, refer to it as “throwing away money.” I would disagree with that statement. A renter is not throwing away money because they’re not building equity, there is always a cost of living and having somewhere to sleep. Whether that is paid to a bank/lender or to a landlord, there is a living expense one has to pay.
Pet Controlled. Landlords have strict rules in regard to what type and the number of animals a renter can bring to the rental. Typically, there are either no pets allowed or a breed/pet restriction. If they do allow pets, the vast majority of landlords charge an additional pet deposit or an increased rent, sometimes both.
Pros of Buying:
Equity. After buying one’s home, the down payment and every principal payment build equity in the home. Notice how I said principal, not a mortgage payment. A mortgage payment is a combination of the principal and interest of the loan taken out to purchase the house. After someone purchases a home, a majority of the first mortgage payments go to interest, while a small portion goes to the principal. That principal payment amount each month is the growth of one’s equity in their home. The equity that one accumulates, over time of owning a house, can be used in order to pay for a child’s education, updates to the house, or other financial possibilities through a home equity loan.
Tax Benefits. Disclaimer: I am not a certified tax professional. Please verify any information with a tax professional.
There are different tax deductions/write-offs that are available for homeowners that renters do not have. A homeowner is able to deduct interest payments on the mortgage (on a loan under $750,000). As I mentioned before, the breakdown of a mortgage payment will show the interest payment of each mortgage amount. Homeowners can also deduct property taxes that they have paid each year. In some cases, one can deduct Private Mortgage Insurance (PMI), and contact a tax professional to see if that is possible for each situation. Although a homeowner can deduct these different payments, they do not get the full return of their payments.
Control. A homeowner is able to take charge of how they want to own their home. They can have people over, do home updates, and treat their house however they want; as long as they abide by the township’s guidelines. They can make any interior and exterior updates that they please. The homeowner can have any type of legal pet they want. People like being in control of the rules and regulations of both how they live and how they want their homes to look.
Cons of Buying:
Renovation Requirements. Utilities and appliances have to be checked and updated as time goes on, or else the house will deteriorate. The constant updating/servicing is one of the biggest disadvantages of owning a home. Even if the roof and septic system has been maintained well, at some point, they will need to be replaced. A homeowner has to know the responsibilities of updating different parts of the home or have to pay someone to do it for them. Depending on the year, you may have to update a multitude of facets in or on the house. Most repairs won’t bring the type of financial return that the homeowner believes it will. Fixr has a great chart that shows the return on investment for different household projects one can do on a home.
Illiquid. Homes in nature are long-term assets. Homes are illiquid because they are assets that can not quickly be converted into cash. If someone chooses to sell the home, they have to go through the process of getting the home ready for sale, finding a buyer to purchase the home, going under contract, and then the home is officially sold; where money can be dispersed to the seller. The shortest timeline for all these steps to take place, and for the home to be financed by a buyer, would be two months. More realistically it takes 3-6 months from the start of the process until the home is converted into cash.
Unsteady Markets. The mass majority of people believe that a home is a “means to build long-term wealth”. When that isn’t entirely true because a home can lose its value over time. If a homeowner does not put effort into updating/renovating the home, then the home is treated more like a stock. Stocks and homes are susceptible to the market going up and down. If there are low-interest rates and a lack of homes on the market, like the 2020-2021 housing boom, then home prices will rise and the homeowner will make a significant profit upon selling the home. If a large employer leaves or if the neighborhood becomes less desirable to live in, there can be an influx of homes for sale on the market. The more homes that are on the market, the lower the home’s value will be. The influx of homes for sale may lead to the home selling for the same price or lower than when it was purchased before.
As you can see, there are numerous reasons why one would choose to rent over buy and why someone would want to buy over rent. The reason why this is such a great debate is that there is no complete or true answer to which choice is better. Many of the deciding factors of why someone wants to buy or rent are due to the intangibles of their life. Whether they want to be in control (the pride behind owning a home), or someone’s lifestyle choices, interest rates, and inventory of homes for rent or for sale all affect the decision maker of whether they choose to buy or rent. One should evaluate their own life and see what is important to them. After that, talk with an expert, like myself (a real estate agent) or a mortgage lender, to figure out the possibilities and what is the right decision for them. Or… you can just buy a multi-unit property, live in one unit, and rent out the other unit(s).