How many times have you heard this phrase:
"I'm tired of throwing money away on rent." -- or -- "If you're renting, you're throwing money away."
Our society holds a pervasive myth that rent is "throwaway" money. But the truth, however, is much more complex.
As a homeowner, you'll "throw money away" on all types of expenses, ranging from property taxes to homeowner's insurance, from sprinkler systems to gutter click here cleaning, from power-washing to HVAC repair. You'll pay for closing costs, title insurance, Realtor commissions and homeowner association dues.
To clarify: I don't believe that any of those above expenses represent "throwing your money away" -- just as I also don't believe that renting is "throwing money away," either. In both cases, you're exchanging money for a desired good or service.
The question, then, becomes: Which do you desire more? Would you be happier renting or buying?
Let's take a look at some of the factors that should play into your decision.
Advantages of Renting
#1: Mobility. Want to spend the summer in Paris? Live in New York City for a year?
As a renter, you have the flexibility and freedom to move to any new location. Just wait until the end of your lease (or negotiate an early-lease-termination with your landlord) and you're free to travel anywhere.
As a homeowner, on the other hand, your hands are tied. You can't just step away from your mortgage. Yes, you can sell the house, but that's a long, cumbersome process involving plenty of risk.
#2: Price Flexibility. Did you get laid-off from your job? Decide to change careers into a lower-paying but more-satisfying field? Do you want to become a stay-at-home parent?
As a renter, you have the flexibility to change the price that you pay for housing. If you're a high-income earner and you'd like to live in a beautiful, upscale home, you're welcome to sign a one-year lease on a fancy condo. If you later endure a job loss, decide to bootstrap a business, or switch from a two-income household down to one-income, you can move to a different unit with more affordable rent.
As a homeowner, however, you don't have that flexibility. You're locked into your mortgage for 15 to 30 click here years.
#3: Lower Costs. In many areas, the cost of renting is actually cheaper than the cost of owning a home.
Many renters assume the opposite. They make the mistake of comparing their landlord's mortgage to their monthly rent.
But the mortgage payment is only one small portion of a homeowner's overall expenses. Homeowners also need to pay for repairs, maintenance and higher accounting fees. (And landlords need to cover all of those expenses, plus vacancies, property management, book-keeping and legal fees.)
How much does this cost? As a general rule of thumb, homeowners should set aside one percent of the purchase price each year for repairs and maintenance. The owner of a $300,000 home, for example, should set aside $3,000 per year.
Owners won't literally pay this click here much each year. Some years, they may only pay $1,000 for maintenance. Other years, however, they'll pay $15,000 for a new roof.
Advantages of Owning
That said, however, there are a few benefits to owning a home, as well.
#1: Potential Appreciation. Let's be careful with this point. Many homeowners point to the rising value of their home to defend their decision to purchase a property.
Indeed, from 1968 to 2004, median home prices rose 6.4 percent annually, according to data from the National Association of Realtors. Inflation averaged around 3 percent during that same timespan, meaning that housing boasted "real returns" of 3.4 percent after inflation.
However, during that same timespan, the average size of a home grew by about 60 percent, according to the National Association of Home Builders. In 1970, the average home was a moderate 1,500 square feet; by 2004, the average home size reached 2,369 square feet.
In other words: After adjusting for inflation and for the cost-per-square-foot, housing hasn't risen quite as dramatically as people might believe.
http://www.youtube.com/watch?v=0J9_ypacZMA
One person's "flexibility" is another person's "lack of stability." And one person's "stuck" is another person's "steady." The way you'll feel about buying vs. renting is very much in the eye of the beholder.
So make the choice that best fits your priorities and personality. And don't buy into the myth that you're "throwing money away" if you rent. Your choices are worth much more.
