Most people think that it is better to own a home than to rent a home. Why is this opinion so prevalent? People have had several ideas drilled into their heads over and over again:
- If you pay $1,000 in rent each month, you will never see that money again. If you pay $1,000 on your mortgage, it is like putting that money into a savings account (because you can sell the house at the end and get your money back).
- Home prices always go up in the long run, meaning owning a home is like having an investment that you can live in.
- Owning a home is the “American Dream”. You can customize your house however you like and live there forever in your castle.
- It’s fun & profitable to “flip” houses…. buy a rundown home cheap & then fix it up & resell it for a profit.
All of these are great benefits right? Everyone should own a home right or at least the majority of people?
Each of the points above comes with MAJOR caveats and there are also very strong points on the other side. Some concerns with items 1-4 above:
- The monthly cost of renting is usually far cheaper than the monthly cost of owning and you can quit anytime. The monthly payment on a $300k 30-year mortgage with a 5% interest rate is $1,610. Renting a comparable place is generally much cheaper. You are also forced into a contract for 30 years, have to pay 6% commission to the buying & selling agents ($18,000), pay all the closing costs (surveyor, appraisal, loan processing, government offices)- generally $6-10,000. You generally don’t notice all these other costs because the real estate agents & loan officers are smart enough to build it into your loan so you don’t think about it.
- Home prices do not appreciate faster than inflation. According to the National Association of Realtors (the guys who make trillions helping you buy & sell houses), the price of existing homes increased 5.4% annually from 1968 to 2009. After you adjust for increases in the size of a home (remodels & add-ons), the actual price increased at a 3.7% rate each year… while general inflation over the same period was 4.4%!!! Another respected metric, the Case-Schiller Index (which tracks sales of the SAME homes), shows the average home price increasing 3.4% annually from 1987 to 2009… while inflation was 2.9% over the same period.
- Owning isn’t as fun as you might think. As most homeowners can attest, houses are very expensive & difficult to maintain. A renter can call the landlord to fix broken pipes, dangerous electrical setups, gas leaks, paint the house inside & out, maintain the landscaping, refinish the hardwood floors, recarpet the floors, change the locks, fix broken windows, exterminate pests, handle government permits and on down an eternal list of things to do. As a homeowner, you must either educate yourself how to do these things or hire contractors and pay out the nose for it. Guess how much it costs to have a pro install a new water heater? $800-2,000. Repaint the house? $5,500 for 3,000 sq. feet- and should be redone every 3 years. You are also stuck in the house for better or worse. It is far more difficult to move elsewhere for work or life reasons if you own a home rather than rent.
- Flipping houses is best left to professionals. Several good friends of mine during high school had parents who flipped homes professionally. Their parents had engineering degrees and ran successful construction companies. They handled all the work themselves and had their regular employees work directly under their supervision. During the boom times of the 90s and early 00’s they made great money, though they still had to deal with endless headaches (sketchy contractors, cost overruns, scheduling issues, city permits, etc.) Now that the market crashed over the last two years, they are barely ekeing by and a couple have even been forced into bankruptcy. The real estate industry is like any other business- tough & requires thorough knowledge and planning to be successful. My guess is that unless you have trained under a company that flips houses regularly, you will have a tough time profitably flipping yours. Also, don’t forget to factor in the cost of your own work- you wouldn’t work for free for your employer right? You should factor it in when working for yourself too. If you could make $20/ hour doing secretarial work, why would you put in 2,000 hours flipping a house for a profit of only $30,000? You could’ve made $40,000 typing instead of digging holes, breathing paint fumes and scalding your hands on pipes!
The benefits of renting over owning are numerous for people who are not professionals. You can move anytime you get a new job quickly and easily, you have no long term financial commitments which frees up your money for investing in areas you ARE an expert in, you don’t have to deal with contractors who do half the work then quit, you don’t have to breathe paint fumes, you don’t have to try to figure out how to redo the crown moulding, you don’t have to resod your front lawn (a hellish job), and you don’t have to pay enormous transaction fees for buying & selling.