The debate on whether to rent or buy is an important one, and it resonates with many because of past economical crises.
Think back over a few years with me. Our economy took a hammering – you could say it had a major “health crisis”. Having to navigate through those days has made us all appreciate better times. As a result, most of us have, to one degree or another, taken stock of our financial fitness, and many people have since tried to get fiscally stronger. None of us look forward to another episode like that, and if one should come along we definitely want to be better prepared.
An area of greatest interest to people has been real estate. This is only natural because the 2008 meltdown has been repeatedly linked to the “housing bubble”. We heard about it day after day in the media. Sadly, many people lost their homes through the crisis, and many more took a hit on the value of their properties. Nationwide, home values have still not recovered to pre-2008 levels.
What overall impact has this had on home ownership? You might be interested in the following statistics:
• In a 5-year period following the economic downturn, 1.2 million people left the ranks of homeowners, while 4.2 million new renters emerged.
• There has been a corresponding boom in the construction of new rental apartments. Each year since 2010, construction of apartments and condominiums has grown at a faster rate than single-family homes. In 2015, U.S. builders began construction on 396,600 units in buildings with two units or more – the most in a year since 1988.
So, this data points to a shift away from home ownership. But this begs the question: What is the most “healthy” way forward? Is buying a home still always better than renting? Most of us were raised to accept the conventional wisdom that renting is just “dead money”.
The answer (as usual), however, is that there is no one-size-fits-all solution on whether to rent or buy. Home ownership may still be a sound decision for some people, but it’s not always bound to be right for everyone.
Rent or Buy:
Important Questions You Should Ask
There was a time when home ownership seemed to make such obvious sense for everyone that it was a central part of “the American dream”. The reality is, however, that we live in quite a different America today. The population is far more mobile now; people relocate many more times in their lifetime than our grandparents did. Property taxes have risen, and the tax benefits of home ownership have decreased.
“It’s easy to underestimate the real cost of home ownership.” – Suze Orman
All of this means that you need to think through some important questions when considering whether to rent or buy :
1. How long do you reasonably expect to live in this home?
An estimated 43 million Americans will relocate this year. Around 40% of those will be work related, and another 18% will be military or government assignments. Obviously, the longer you can stay in a home, the more viable it will be to realize gains by owning it. So you need to honestly evaluate the stability of your life and your job. Renting can offer a greater flexibility if you’re not sure where you’ll need to be in the near future.
2. Have you factored in ALL the costs of home ownership?
Many people make a false comparison between the cost of paying a mortgage with the cost of renting because they fail to consider all of the additional expenses incurred:
• property taxes
• homeowner’s insurance
• annual maintenance costs (1% to 4% of the home’s value according to HSH.com)
• pest control
• realtor fees when selling (typically 6%)
3. Do you have enough savings for a down payment and for ongoing maintenance?
Even if home ownership will be advantageous in the future, there are times when renting is the smarter strategy “for right now”. It can give you the time you need to build financial strength so you can safely and comfortably afford to buy.
4. Does home ownership make sense in your overall investment portfolio?
For some people, it can be advantageous to move away from one large investment in real estate, converting your equity into liquid investable assets that offer a better annual rate of return. You still might choose to have real estate as part of your portfolio, but home ownership is not the only way to do this. For example, REITs (Real Estate Investment Trusts) are similar to mutual funds, and offer the ability to invest in the real estate market without personally owning property. If the residential housing market slows, rental and commercial properties tend to pick up, and REITs can allow you to take advantage of the sectors that are performing best at any given time.
Renting is not the silver bullet
You must bear in mind that there are also potential downsides to renting that need to be considered. The biggest unknown is the rate of inflation. A fixed rate mortgage means that a homeowner can be confident that at least one part of their equation is not going to increase over time; the renter, however, is at the mercy of the market.
And for many people, of course, convenience is the most persuasive factor of all. But even this is a double-edged sword. Home ownership gives you the freedom to renovate and decorate as you see fit, and also to have whatever pets and hobbies you desire. Renting is far more restrictive. On the other hand, renters enjoy other conveniences such as freedom from maintenance chores.
The bottom line is that there are numerous factors that need to be realistically weighed. For some people, buying a home will be a good decision, but for others renting can make just as much good sense.
Whatever your housing situation is today, and even if you’re already leaning one way or the other regarding whether to rent or buy, sitting down with a financial planner to carefully weigh the options and consider both short and long term strategies can help you make the really sound decisions that you need.