Your home is likely the single largest expense in your budget. If you don’t already own a home, you’ve likely thought about the possibility. You’ve probably heard a lot about how buying a home is the best decision you’ll ever make. You might already be saving up for a down-payment, which is great!
However, before you take the plunge into home ownership, consider both the pros and cons. The buying vs. renting decision isn’t quite as easy as people make it out to be. Financial advisers, realtors and bankers and your average Joe like to talk a lot about the pros and neglect the potential drawbacks.
A Home is Worth What it Saves in Rent
Financially, home ownership makes sense if, over the long-term, it costs less than rent. For the life of the mortgage, your home will likely cost a little more than renting. However, once you pay off your mortgage, your home will suddenly become one of your smaller budget items. This often happens as you’re approaching retirement, potentially making this an important piece in your retirement planning.
Owning a Home Costs More Than Your Mortgage Payment
It’s easy to run a mortgage calculator for the purchase price of a home. Often you’ll find that your monthly payments are even cheaper than your monthly rent. Just based on this, you might be tempted to think that buying a home is the clear winner. Unfortunately, things aren’t so clear. The mortgage payment is certainly important. Initially, it’s the largest single cost of owning a home. Just reducing the interest rate on your mortgage can save you thousands on home ownership. But, the mortgage is not the only cost involved.
When you own a home, you have to pay property tax- typically several thousand dollars a year. You also have to take out home insurance, which is another thousand or so. But perhaps these two have been factored into your mortgage payment.
Maintenance Can Be a Headache
Home maintenance is often the cost that is the least anticipated and the hardest to budget for. Especially if you buy a nice new home or a recently renovated home, its hard to imagine what can go wrong with it. But things do.
There’s no cosmic rule that requires a house to only cost you x% in home maintenance. Since maintenance is so unpredictable, budgeting for it can be a huge headache. For all I know, my roof, hot water heater and back door might be conspiring to cause problems in the same 2 month period.
You are also responsible for taking initiative for the maintenance. You need to know when maintenance needs to be done on the house, and either how to do it or who to call. If you ignore a leaky roof, water damage will soon cost you far more than several months of rent. Letting animals run rampant in your attic can do the same. Not managing water runoff can lead to serious foundation repairs. The list goes on, but you get the point.
For some, managing home maintenance is not an issue. You know if you’re comfortable budgeting for home maintenance with an emergency fund. You might even enjoy doing the occasional odd jobs around the house. But you know yourself. If you’d rather not think about maintenance, having a good landlord can definitely be a better option. Renting might be a small price to pay to have somebody else handle keeping up with all the maintenance and absorb the risk of larger than anticipated maintenance costs.
Landlords Might Be a Headache Too
A good landlord can make renting a great experience. Note that I specified good landlord. Unfortunately, landlords have a bad reputation because of the few that will ignore upkeep to save a few bucks. Fortunately, if you do end up with a lousy landlord, renting gives you the flexibility to find a new one. Even if you’re in a contract, courts will usually honor good grounds for termination.
Keep in mind that your relationship with the landlord is a two-way street. If you’re a good tenant, your landlord has a lot more of an incentive to take care of you. Pay your rent on time, avoid damaging the property, don’t call your landlord for every burnt out light-bulb, and he’ll be a lot more likely to respond promptly when you do have that running toilet.
Buying and Selling Incurs Additional Costs
The process of buying and selling homes comes with significant costs. The most significant are the closing costs and real estate agent’s commission. You also risk seeing your home drop in value between buying and selling it, which can take a big bite out of your equity. If you need to relocate within a specific time frame, you face the risk of having your old house sit on the market even after you’ve moved into a new house, leaving you with all the expenses of both houses. All these costs can easily make home ownership much more expensive than renting for your entire life. A good rule of thumb is to only buy a home if you plan to stay put for 7 years or more. If you anticipate moving more often, the costs of buying and selling a home likely will outweigh the benefits of owning the home.
Owning a Home Gives You Control
When you buy a home, you’ve got a place that you can really call yours. You can paint each wall a different color of the rainbow. You can landscape however you want. Perhaps more importantly, you can make improvements without consulting a landlord. If you want a deck, energy-efficient windows, or a kitchen remodel, the place is yours to improve (as long as you pay for it). We recently put solar panels on our house, which will pay for themselves in 12 years. This is something that we wouldn’t have been able to do had we been renting.
A Home is a Primarily a Place to Live, not an Investment
One common argument for buying a home is for its investment value. People like to point to housing booms, such as the decade leading up to 2006, and talk about how real estate beats out any other investment. Realtors and bankers like to use this argument to talk you into far bigger homes than you actually need. They rationalize that you’re building equity and net worth. They’re quick to explain that the larger mortgage payment just means a larger tax deduction.
While it’s true that the market value of homes do typically go up over time, the home market goes through booms and busts. Because the home market is ‘cyclical’, over-borrowing just to buy a bigger home exposes you to the risk of being ‘underwater’ when the housing market does take a downturn. When you’re underwater on your mortgage, you owe more than your home is now worth. Now you’re faced making large payments on a house with negative equity in an economic downturn. To make matters worse, the negative equity makes the house difficult to sell if the need arose.
Buying a bigger home than you need also comes with higher property taxes, utilities and maintenance costs. And that mortgage tax deduction that bankers like to talk about only gives you back part of what you paid in mortgage interest. So taking a larger mortgage will always end up costing you more. The biggest thing that you’ll get from buying a bigger home is the headache of a squeezed budget. And that’s if you don’t end up losing your home because you defaulted on your too-high monthly payment. Stick with a sensible size/value home for you, and use actual investment products to grow your wealth.
Buying vs. Renting is Ultimately a Personal Choice
Buying vs. renting really comes down to your lifestyle and your goals. There’s no ‘right’ choice. Figure out which one fits better into your ‘why’ of personal finance. If you prefer having control over your home, buying might be better. If you’d rather outsource the maintenance, you might be better off renting. Or if you do buy, find a handyman you can trust.
Financially, buying a home typically makes sense as long as you only buy as much house as you need, and as long as you plan on staying put in your new house for the long haul. If you do decide to buy, just be sure that you can budget for the extra month-to-month expenses that come with home ownership.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.