Renting Makes More Financial Sense Than Homeownership

[Aleta]

You're hearing more of it recently, because it has been all of the rage. After the internet bubble and stock market downside people wanted to invest money into something tangible.

There was a very long time in many areas of the country where the prices for real estate didn't move up that much and where my Mom lives they actually went down. So, many just replace the stocks with real estate. Also, we had people from South America coming to Florida buying property without even looking at prices because their own economy was unstable.

[LivingAlmostLarge]

It depends solely where you live. If renting is equitable to homeownership. Most areas of the country it makes more sense to buy because it's just as cheap as owning. Only where homes are ridiculous is it better to rent.

[getforfree]

When you are paying for your home vs rent, you will have the house after the 30 years. You will be mortgage-free by the time you retire. You will have something to give to your kids after you die.

Plus the rent always goes up. When you have the fixed rate mortgage, you will still pay the same (or maybe only a few dollars more every month because of the tax and insurance), and the 1500 you pay now every month seems like a lot now, but 20 yrs from now it won't be much, and I think it will be cheaper than to rent a similar place.

[Aleta]

Again, getforfree, it all depends on where you live. I live in South Florida and our property taxes and insurance is a huge problem down here. We have businesses that have relocated out of state. We also have folks on fixed income unable to pay the ridiculous property insurance. Not to mention that the insurers aren't really insuring what they used to. I look at the policy and say "why buy hurricane coverage".

I personally like home ownership, but for some people that are single, renting can come out more economical for them when you figure in ALL the costs.

[disneysteve]

wow is that true? for 30 years average appreciation for homes exceed flation by a little more then 1???

if that's true how come I hear all those people getting so filthy rich by investing in real estate?

That is true. The reason people can get rich with real estate, however, is leverage. Let's look at two scenarios.

1. Invest $25,000 in stocks. Have them appreciate by 10%/year for 5 years. You will end up with about $40,000 (before taxes and brokerage expenses). You've made a profit of $15,000.

2. By a $250,000 rental property with 10% down, thus investing the same $25,000 initially. The rent collected covers all expenses to a break-even point. The property appreciates at 5%/year. After 5 years, you sell the property for about $320,000. You've made a profit of $70,000.

So the real estate investment beats the stock investment by $55,000 even though the growth rate of the stocks is double that of the real estate.

[disneysteve]

I do not consider my home to be an investment. Why not? I define an investment as something purchased for the purpose of making money. I didn't buy my home to make money. I bought it so my family would have somewhere to live. If it shoots up in value, I don't plan to sell it. If it falls in value, I also don't plan to sell it. It is our home and we plan to stay here for many more years (it has been 13 already).

[disneysteve]

One last post for the moment. My mother moved out of her house last June. She had lived there since 1955. It was paid off long, long ago (less than 10 years after they bought it). She moved into a senior apartment complex, so is now a renter. Bad deal? I don't think so.

Even though the house was paid for, we figured out it was costing her an average over $700/month to live there between utilties, taxes, insurance and maintenance. Her apartment is only costing her about $500/month. So she is ahead by $200/month right away. Plus, she now has the proceeds from the sale of the house invested and generating about $500/month in interest income. So the bottom line is that she is now $700-$800/month ahead by renting vs. owning. Had she remained in the house, it certainly wouldn't have been appreciating by $700/month so she is way ahead this way.

[BCHGRL]

Owning a home does not mean owning a yard or extra space. You can own a condo, townhome, or small apartment. I've rented before, and when a hurricane came, I had to live in the resulting hell hole. Why? The landlord was cheap and didn't want to make the repairs even though she could afford it whether or not insurance paid. Owning your home is the peace of mind that you or you and a family have a comfortable and safe surroundings that is not subject to the whim of anyone else (i.e. landlord). Despite monetary value (housing prices have gone down from when we bought), you don't have to worry that tomorrow you'll be out on the street and at the mercy of someone else. Sure, you have legal rights in a tenant/landlord situation, but do you know how long it takes the wheels of justice when your legal rights have been violated? Been there, done that. I will never rent again for that reason.

[brig2221]

That is true. The reason people can get rich with real estate, however, is leverage. Let's look at two scenarios.

1. Invest $25,000 in stocks. Have them appreciate by 10%/year for 5 years. You will end up with about $40,000 (before taxes and brokerage expenses). You've made a profit of $15,000.

2. By a $250,000 rental property with 10% down, thus investing the same $25,000 initially. The rent collected covers all expenses to a break-even point. The property appreciates at 5%/year. After 5 years, you sell the property for about $320,000. You've made a profit of $70,000.

So the real estate investment beats the stock investment by $55,000 even though the growth rate of the stocks is double that of the real estate.

A few things you didn't take into consideration here. First off, take 6% off the top of that $320,000 in realtor fees. That amounts to $19,200.00.

Second, you need to factor in the added costs of homeownership in property taxes and homeowners insurance. Using your $250,000.00 purchase price, I would conservatively estimate you would be paying about $4000/year in property taxes, and about $1200/year in homeowners insurance. Pay that for five years and you are out another $26,000.

However, you do get tax benefits with homeownership by being able to deduct your property taxes and interest payments on your loan. Figuring a $225,000.00 loan at 6% over 30 years, you will have paid $65,311.62 in deductible interest and $20,000.00 over that same 5 year term in property taxes. Assuming you are at a 28% marginal tax rate, that is a tax savings of $23,887.25.

So, you are out $26,000.00 in homeowners insurance and property tax costs, but you also theoretically realize $23,887.25 in tax savings. So you are out about $2,112.75.

Now lets take a look at home maintenance costs. Most experts tell you to budget about 2% of your homes value each year for home maintenance costs. Using the initial $250,000.00 purchase price, that is about $5000/year. Take that over five years, and you are looking at $25,000.00.

So, you start off with a $70,000.00 profit after an initial $25,000.00 down payment on the home. After taking Realtor fees, homeowners insurance, property taxes, and home maintenance into consideration, you are left with only $23,687.25 in actual profits, much closer to what you would get in any other investment.

Here's the thing. For every hot real estate market in America that will actually appreciate at the level your example did, there are 25 more where they didn't. In those cases, after you take out the added realtor, property tax, homeowners insurance, homeowners association, and home maintanence costs, most are left barely breaking even if that.

Owning a home is still a priority with me and always will be for other reasons, but certainly not as an investment or mechanism to make money. It's too much of a crapshoot given all of the extra hidden costs that most don't account for and the fickle nature of the residential real estate market.

[disneysteve]

brig2221 - I agree with you 100%. I was just answering the earlier question of how people make money in real estate.

As for your adjustments to my oversimplified example, if this was a rental property, hopefully there would be positive cashflow, meaning taxes and insurance were accounted for in the rent payments. I assumed this was a break-even deal (other than maintenance).

[Ima saver]

I have owned my home free and clear for 30 years. although my taxes hav doubled the past year, I can still get by on about $3000 a years for taxes and home insurance. Can't rent for $3000!!

[Coleroo]

Around here (mid south carolina) renting would have been more expensive than owning.... and I agree with the other post above - my home is more like "insurance" against personal fears.

My husband and I are now 24 and purchased our first home a year and a half ago. Its a 3 bedroom, 2 bath, 1150 sq foot ranch style on a halfacre of land in one of the only secluded private streets in this town. We're in a safe area too. We're only 2 miles from our state's booming capital city (columbia), with immediate access to everything we can think of we might need. Our mortgage is a 30 year fixed and payments are only $675 a month. Around here right now you can't rent ANYTHING safe for less than $800 a month (and thats usually a 2 bedroom price). We have a large yard, large patio house in the back, freedom to do whatever we want with the place, and assurance that our base mortgage price will not rise over the years. Taxes and home ownership are a drop it the bucket too (sc has a great low cost of living). We also have no home ownership fees.

We did research on all of our options for months - renting, apartments, trailers, everything and purchasing made the most sense. The way I see it, we could have "paid cheap rent" (interest) to the mortgage holder or we could have paid expensive rent to a landlord. (We HAD to live somewhere, right? Its not like I had the choice to invest the money in stocks instead.) The former will give us a paid for home by the time we're 53 (thats maximum - if we never pay anything else on principle) and equity... while the latter would take MORE money out of our pockets, rates would constantly rise, and in the end we will have nothing to show for it. Makes perfect financial sense to me. Not a dream, not an "investment".... just good financial sense for us. We plan on staying here for the long haul, so we could care less if the value rises to a million or falls to zero.

I see this article as a way to discourage people from getting in "over their heads" though and offer alternative ways of thinking for those who buy above their means or live in high price areas.