I’ve been on and listened to both sides of this debate over the last 3+ years. Most of you are aware that one of my goals this year is to buy a home, but last year, I also outlined a long list of benefits to renting. Recently, a compelling counterpoint emerged from Baker at Man vs. Debt, outlining the case for renting as the new American Dream.
I believe Baker correctly points out that “there is no one-size-fits-all answer.” I also believe that the arguments many people use against buying a new home and for renting fall completely apart when looked at in further detail. Today, I’d like to make a strong case for buying.
Consider your typical landlord. Some are companies or large organizations; others are people just like you and me who got into real estate through one avenue or another. But what motivates them all?
I think we can all agree that the typical landlord is not out to lose their shirt on their purchase/business. If they are, they will not be in business for long.
In this simple concept are some important implications, the most important of which are the landlord’s income and expenses.
On the expense side:
- The landlord must pay for all of the typical things that a “homeowner” is typically liable for in the argument against owning a home, which includes property taxes, maintenance, upgrades, insurance, equipment, landscape maintenance, and often many of the utilities like trash pickup and water.
- In fact, I would argue that the landlord’s expenses are often greater than the typical homeowner’s “share,” since the landlord must also pay for things like security, property management, the cost of cleaning up and re-renting apartments, damages caused by renters, and more.
- Finally, and hopefully, the landlord can take a profit for all of his or her troubles in this business venture.
On the income side, the landlord has rent income. Property appreciation aside, that’s really it. Rent in, expenses out.
Your rent must pay for all of the above expenses, profit, and more. Your rent pays for maintenance. It pays for upgrades. It even pays for taxes, even though I have yet to convince Financial Samurai.
This is also where the “guy next door” factor comes in. If the next guy decides to trash his unit, you pay the cost. If he decides not to report that roof leak, you eventually pay the cost. You get the idea…you are paying more, however marginally, in order to have the peace of mind that your rent will cover whatever comes up.
I believe the idea that renting is “cheaper” than buying a home because of all the maintenance and upgrade expenses required is a fallacy of the highest proportions. I do believe that people spend more as homeowners, but I also believe this is due to two other factors:
- Most people rent apartments, while they buy single family homes. The upkeep on a SF home is significantly greater than on an apartment, and their bottom lines reflect this reality, many times to the new homeowner’s surprise.
- People feel the need to, enjoy, or are otherwise compelled to upgrade/renovate their homes beyond what is required.
If upkeep is not your cup of tea, why not consider a condo purchase? To the other point, learn to practice contentment with what you have, or accept the fact that you’ll be inspired to modify your space to your own needs, at a future cost.
Having said that, renting is not out of the question. To me, renting is a form of insurance. In this particular case, we’re insuring against:
- The risk of having to do property upgrades and not having the money.
- The risk of having to do major maintenance and not having the money.
- The risk of having to or wanting to move in the future and not being able to sell your home.
- The risk of any of the other expenses unexpectedly going up (taxes, insurance, etc.).
If you rent an apartment, the cost of doing repairs, maintenance and upgrades (and in fact, all of the expenses) is spread among all of the tenants under the landlord’s care. If your air conditioner breaks, the cost is absorbed by your rent and the rent of the 300 other people that might be renting with you. You might effectively pay a couple of dollars for that new A/C, hence the “insurance” concept at work.
(Note: If you rent a home from someone who only owns one property, this idea doesn’t apply. All costs are effectively transferred into the rent, though perhaps not immediately.)
Buying a home means taking on personal responsibility in the sense that you assume all risk. If something breaks, it’s on you. You must pay for it, take care of it, and/or repair it yourself.
However, it also means that:
- You don’t pay your landlord’s mortgage, taxes, and all other associated expenses.
- You reap the tax and asset benefits of paying all of the above.
- You don’t pay to fund your landlord’s profit margin.
- You don’t assume the risk of other people under your landlord’s care, only your own.
You decide how to manage your property to reduce risk and minimize expenses. You select the insurance products, the equipment, the maintenance companies, and everyone else that services, protects, and otherwise touches your property, and you make sure they’re to your own satisfaction, standards, and long-term value.
Yes, it’s absolutely true. You might buy a “lemon” or the house Gods might pick your home for a tree to fall on, or some other calamity might wipe you out. But that’s the risk you take…
There are countless more reasons for home ownership (8 of them, actually), but let’s stick to financials. Here are a few more:
- Tax benefits. Not for all, and not a reason in itself to buy, but they do provide some tangible benefits.
- Inflation. A 30-year loan at any percentage but especially 3-4% is a dream, since the payment will remain identical until 2042. What kind of rent will you be paying by the time 2042 hits?
- Retirement. Let’s call it “old age” since we may not retire at all, or even retire early. By the time we are 60 (and much earlier, hopefully), we could have a home without a loan payment. Will you be paying rent until the day you die?
- Moving costs. Constantly moving from place to place can result in a lot of expenses, from re-connection fees to lost deposits.
- Appreciation. Again, not a reason in itself to buy a home, but the potential for asset appreciation over the long run is definitely there and one of many available options to build lasting family wealth.
Baker’s article made me re-think the financials behind the decision to buy a home. Like many of you, for years I simply accepted the notion that in terms of maintenance, repairs, and upgrades, buying a home was way more expensive than renting. I was willing to take on this extra cost regardless.
If you follow my logic though, you can see that this is simply not the case. Renting can in fact be more expensive when it comes to these costs, although the risk is spread more evenly among the renting population.
Your thoughts & debate in the comments are appreciated, especially if you disagree with me! 🙂