We live in a financial world where renters are looked down upon by their ‘superior’ house-owning friends.
They scoff, “You’re throwing your money away.”
They brag, “My house is worth $5,000 more than I paid for it.”
They exhort, “You really need to get into real estate. That’s where the money is.”
Unfortunately, before long renters start to listen to the lies homeowners tell.
Two False Reasons People Say You Must Buy a House
1. First Home-buyer tax credit of $8,000
Quick. Time is running out. Go buy a home and save $8,000. While that might sound like a Real Estate commercial, it is actually a stimulus program currently offered by the US government. While the $8,000 credit sounds appealing, you should only buy a house when the time it right.
How do you know the time is right? Ask your checkbook. If you make a preemptive move to buy a house before you are ready, you will pay more than $8,000 worth of regret, stress, and possibly even interest payments.
2. Homes make a good investment
Truth. Homes are only a good investment when the value of the home increases.
Truth. Home values occasionally decrease.
Your solution – make your home a home and make your investments an investment.
The primary function of a home is a place to live. If you make a profit when you sell your house that is great. But, if your home provided you with a good place to live and you lost money when you sold it, that is fine because it gave you want you needed – a home.
Too many homeowners become real estate speculators instead of house shoppers.
The decision to buy a home involves more than a good online calculator
I’m skeptical of any generic online information. Seriously, why do so many people entrust their lives to a few numbers that a calculator spits out? The lie is that if it makes sense on paper – if the math adds up – then it must be the best decision for you. This, however, is not true. People who only follow the advice of others will continually make bad money choices.
While there are other big ticket items you might want to buy, it is not bad to rent a house or apartment.
My Personal Experience:
My wife and I purchased our first home more than six years after we were married. In many ways we were in a unique situation because I was a youth minister so our housing was provided by the church. For that I am extremely thankful.
Some will say that I should have been building equity by owning my own home. However, having the parsonage for those those two years saved us from our own stupidity. Who knows what crazy thing we would have done if we started looking for our own housing?
Looking back I have absolutely no regrets about waiting six years after marriage to buy my first home. I love being a homeowner. I do, on the other hand, know a lot of people who bought a home early because it ‘made sense’, but now they have serious regrets.
The decision about renting or buying needs to be about your situation in life, your preferences, your dreams, and yes, even the math.
There are advantages of renting a house or apartment instead of buying.
6 Advantages of Renting
- You budget is more predictable. Homeownership lacks predictability. You do not know when the hot water heater will break, when termites will infest your home, or when your foundation will crack. Each of these emergencies require money to fix. When you rent you pay a set dollar amount every month. Regardless of the repairs needed you still pay the same amount.
- You have time to save up money for a down payment. You need to be disciplined in order to do this so perhaps every month you should set up an automatic deposit into a savings account. In the long run this could provide some significant interest payment savings.
- Flexibility. When you are first starting out your marriage it may be difficult to know where you will settle long term. Renting offers the opportunity to move as needed and when needed. You might not be planning to move, but as a renter that becomes a more viable option.
- Less Responsibility (apartment). This may only apply to apartments, but I miss the days when the lawn and the repairs were someone else’s responsibility. I enjoyed just leaving town without needing to find someone to watch the house.
- Emotional Peace. I have debt allergies. I love the debt-free lifestyle. The idea of having a debt (yes, even a “good debt”) doesn’t sound appealing. So many people have so much debt that they are upside down. So many people complained and suffered when housing prices dropped. These are all concerns that the renter avoids. How do you put a price tag on emotional peace?
- Time to get smart. I made some dumb money decisions when I was first married. Looking back now I’m actually amazed that I didn’t make worse choices. Renting gives you time to grow a brain before you buy a house. Renting allows couples to get a clear sense of what they want to own and how much they want to spend. Some lessons can only be learned with time.
Which do you think is better – homeownership or renting? Do you think there is a standard right answer for everyone?
Interesting that you list “predictability” as a benefit of renting, because many people instinctively think that buying is what will give them more predictability. In certain ways it does–you don’t have to keep moving around, etc.
But certainly, the appeal of not having to worry about things breaking, roofs leaking, and grass getting mowed is wonderful.
We’re still renting and will continue to do so for at least a little while until things calm down and we feel we’re in a position to buy or build our first home. The rental price we pay is very competitive, and there’s no danger of getting kicked out or the community folding under that I can see.
People buy for pride of ownership 99% of the time.
I’m going to buy, but only when I’ve saved up enough to pay in full, in cash.
While waiting for that, I will make smart decisions with my money:
1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.
2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($25/month from Insurance Panda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.
3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.
4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.
5) I need life insurance to protect my daughter, but I ditched a $275 a month whole life policy for a policy and now I only spend $25 a month. I save the difference to my Roth IRA.
6) The most important one – make as much as I can. Save as much as I can.
1 is a fallacy, your repair bills are just factored in to your rent.
2 is questionable, the only way this happens in most cases (not in areas where price/rent ratios go skewed) is if you rent a place that is not up to par with the place you buy. If you are planning to be in the same location, but a smaller place and you can do the same thing. Comparing a 2000sq ft home and saving money by renting a sardine can apartment with people stuck to all sides of you is not a fair comparison.
3 is pretty much the only thing renting has going for it, if your not sure this is where you are going to be in a few years (5 or more I would think) then renting probably is a better option.
4. You can pay people to take care of this in a house too, just like you are paying in your rent for this service if you rent.
5. I’d rather know that in 3 years no one can kick me out to ‘do upgrades’. I think that’s far more emotional peace.
6. Sure, getting together and buying a house right away is a little silly unless you know exactly what you want, but if you want to move in together and item 3 isn’t needed then you just have to be patient and communicate. This isn’t really a renting advantage.
” . . . but a smaller place . . . ” should be buy, not but.
By no means is #1 a fallacy. You just read it wrong. He didn’t say renting is cheaper because you don’t pay for repairs, he said it’s more *predictable* because you don’t cover repair costs out of pocket. Sure, you pay for it through rent, but you won’t have a sudden unexpected multi-hundred or multi-thousand dollar payment. Once you’ve established good financial habits and an emergency fund that’s not critical, but when you’re new to living on your own or haven’t yet, then it very important.’
There is something else here that he didn’t mention, which is your time. If a water heater or whatever breaks, your time commitment when renting is the time to make a phone call and tell the landlord. Not the time to research repairmen, get a quote, and miss work to be home while the work is done. Unless you work at home of course, but still you must take time away from work to deal with it all as a homeowner.
#2 you appear to have misread or misunderstood as well. He’s not saying here that renting is cheaper (it may or may not be, but I’ll get to that in a second), he’s saying that it’s good if you need time to build up a downpayment for a house.
Even if the monthly cost of the house and renting were the same, you can’t buy the house until you’ve built up the downpayment. Or, even if you can, your marginal cost to do so is typically through the roof.
Back to the question of cost you brought up, you say “not in areas where price/rent ratios go skewed”. Well, really that’s still the majority of the country right now, except for markets where housing prices have totally crashed (Vegas, Detroit, etc), houses are still relatively expensive compared to historical means. According to data from Robert Shiller of the Case-Shiller Housing Index, housing prices as an nationwide average are still around 35% above the real (inflation adjusted) historical average. They’re still higher on an inflation-adjusted basis than even the highest of all high bubbles prior to this one (late 70s, late 80s, etc).
#3 and #4 we agree, except again you’re missing the effort/time aspect with dealing with finding someone to watch in #4, just as it was left out of #1
#5 is one where you simple changed topic. You basically said ‘okay but what about…’, so I guess you acknowledge #5 may be valid for some people? Craig never said there were no advantages to owning, just that is one for renting. Seems you agreement. Meanwile, I’d never sign a lease that allows me to be kicked out for renovations.
Again you’re missing the point with #6. Buying a house is a long term commitment with significant consequences. If you sign a bad deal it can effect you for decades. Renting is much less of a commitment so have more flexibility. It’s really similar to #3… flexibility in housing and also flexibility in financial terms, so it’s easier to correct if you realize you made a mistake.
Me? Yes, I’m a renter. Although I’d been looking into owning, but the prices are still pretty off the wall. The 30% needed decrease to return to historical norms would mean a $1500 mortgage would drop to $1050, and a $2000 mortgage would drop to $1400. Then we’d be talking.
@Traciatim Re: #1:
Yes, BUT if you live in a community, it’s more of an insurance-type accounting, because not everyone’s water heater will break or A/C will break, or whatever. If you’re in a home, it’s just you and your home. If it breaks, you’re paying 100% of it. I know that looking at it on a macro level, it’s a wash, but I think you’re more protected that way if you’re in a group of apartments.
You made very good arguments, by the way. Great discussion.
It’s tough, I am younger and not settled and have no reason to look to buy anytime soon. Owning as an investment could potentially be true, but you are not planning on selling right away anyways, so I wouldn’t look at it like that.
Well, for major problems your insurance will cover you in your own home (EI, hot water tank explodes ruins finished basement kind of situations).
For smaller things, like my pump that died on my heating system (electric hot water baseboard) needed to be replaced costing my a few hundred bucks. I had to take that out of an emergency fund to pay for it since it wasn’t a planned expense. Which brings me to a great point going for renters. You don’t have to be responsible with your finances. This explains a great deal why the net worth of individuals who rent is far lower than individuals who buy.
1) Renters are paying others for services that they could take care of for themselves
and
2) Renters don’t save the difference, as shown by the net worth stats. If they were being responsible the net worth stats would be equal or skewed toward renters because they would be more exposed to stocks/bonds which generally do better than leveraged real estate (because of the interest drag).
The major point that buying has going for it for the average person (IE, not the person that invests the difference by buying less housing . . . but ‘normal folk’) is that buying a place your payments end eventually and are inflation protected.
If you buy a place today and your payment is 1000 bucks a month, and rent a place for 1000 bucks a month, in 25 years at a 2% inflation rate your rent will be about 1650, vs still 1000 bucks for your house (I know, property tax and maintenance and stuff goes up . . . but your mortgage ends). If you took a 25 year mortgage, the next year your rent will still go up, but the purchaser has their home and no one can take it away. Assuming they do no other savings and rely on CPP/OAS, it’s far easier to live without a huge monthly payment when your just trying to relax. This is why the general rule should be for people to own the home they live in, because eventually it’s going to make your cash flow far easier to manage. Very few people are disciplined enough to plan fully for their retirement, as shown by stats on retirement accounts and retired people stats.
I think it really depends on your personal situation. I’m currently renting a house after owning two other homes and I like the idea of being able to move to another area without having to worry about selling a house. If I lose my job due to the economy it will be easier for me to relocate to find another job. I also agree with all your other reasons, there’s less stress when you’re renting because if the furnace goes out or the roof leaks I don’t have to worry about huge unplanned expenses. Just because you can get a mortgage payment that’s lower than your rent doesn’t mean you’ll be saving money by owning a home.
I don’t think there is a standard answer for anyone. I bought a house almost 3 years ago becuase I thought it was a good investment, etc. and now I’m regretting it because I want to move but don’t want to lose a ton of money! 🙁 Plus, it is so much work to own a house!
Wojciech,
Sounds like a smart move to me – waiting until “we feel we’re in a position to buy”.
I think a lot of peole who prematurely rushed out to buy a house might just look back in a few years and and regret their choice.
Keep it up!
Traciatim,
Re: Comment #1
Thanks for your comment.
While I might not be able to convince you, each item I listed is 100% true based on my experience. If, however, your experience is different that is fine. I wish you all the best with homeownership. By the way, I am a homeowner. I have been a long time renter. Both are awesome options – depending on your situaiton in life. See Wojciech above. He is a genious because he knows what is best for him now. He does not listen to talking heads but judges and evaluates the situaiton based on his own finances, goals, and preferences.
Re: Comment #2
In your example of the pump, you had to take money out of your emergency fund. If someone does not have an emergency fund they might not be ready to buy. They might need to rent – predictability.
I’m not anti-homeownership. I’m simply informing renters that they are not financial morons for renting (as some people insinuate). There is a time and a place for everything. If I rushed the timing when I bought my first home I KNOW I would regret it today. But, now I have absolutely no regrets (See Mrs. Money below).
This post simply claims that homeownership is not for everyone and that, in fact, there are advantages of renting – at least six.
@fredct
Awesome. I couldn’t have said it better myself.
Actually, I’m on vacation and it is driving my wife CRAZY that I’m on the computer right now so I’m glad you properly defended each point because it means I can get back to my vacation sooner.
Clap, clap, clap. I applaud you.
@MBAbriefs
Excatly, “depends on your personal situation”. I completely agree.
You overlooked another advantage of renting – you’ll never be tempted to wallpaper anything. Wallpapering can place a tremendous amount of strain on a relationship, especially if you’re attempting to apply it in a small, confined space, like an entry way.
LOL. no doubt. Paint is much better. 🙂
Nope not all repair bills are factored in. As a previous landlord and homeowner i can tell u that if i had factoref in all the repair bills i had that would have generated a $1,800k monthly rent in a neighborhood where the highest u can go is about $1,500 if u wanted to rent it out and not have it sit for months. So yes landlords often have to swallow the costs of unexpected repairs that can run much higher like foundation, sewer, electrical, hvac, roof etc