The Benefit of Renting Verses Home-Owning



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The Benefits of Renting Verses Home-Owning A common belief is that it is better to own your own place to live as opposed to renting one from someone else. What has made this belief so common and is it accurate? While there can be a emotional gratitude to owning your own home, does that make it a better financial decision? There can be many advantages to renting a place to live as opposed to owning your own home. One of the costs people do not take into account when thinking about buying a home are the hidden costs of owning a home verse renting.

First, when you rent a place to live and something breaks or wears out you simply contact your property owner and they take care of arranging to have it fixed. Whereas if you own the home you will have to take care of these repairs, both in finding someone to repair or replace the broken or worn out item and pay the costs for the work and item. Basic maintenance of a home cost according to mortgage-data firm HSH Associates is about 1% of the home value per year. Which does not take into account the major repairs of assets such as an air conditioner, dishwasher, refrigerator, or furnace.

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It is suggested that an additional 1% of the home value should be set aside per year to cover these costs. If a home is bought for $100,000, that equates to $1,000 per year in annual maintenance. Add in a little leeway, and it is closer to $1,500, or $125 per month. Because of inflation the maintenance cost increases each year to stay 1% of the home value throughout the life of ownership. With the historically home value increase of approximately 4% a year and 1% of that representing the annual maintenance cost that leaves only a 3% increase which is the long-term inflation rate.

Leaving a net home value increase of 0%. If that same amount of money spent on annual maintenance was instead invested the amount of money, assuming a 7% annual return would be $21,502 after 10 years, $63,801 after 20 years, and $147,008 after 30 years. Imagine if the amount of money a home owner paid in taxes were added to the amount invested. So even if the monthly rental cost where equal to the loan amount for the same living space the renter would come out ahead to the homeowner; assuming the renter invested the additional cost the homeowner had to pay.

The second hidden cost most people do not take into account when deciding to buy a home is the property tax levied on the value of your home. Depending on where you live and the value of your home this could be a substantial cost per year. For example “Fifty percent of all households in New Jersey pay in excess of $5,352 in property taxes a year. ” (Sinavshaia, 2007) While New Jersey does not have the highest home prices in the country, the amount demonstrates that the property tax in the area a home is purchased in needs to be researched.

The second thing to consider whether to buy verse rent is the upfront costs. The typical upfront cost to rent a place is equivalent to one to two months’ rent. Whereas the typical upfront cost to buying a home is approximately 20% of the home value. This could vary depending on your credit score or the interest rate on the loan that the home buyer is trying to obtain. This could lower the percentage down to 15% or increase it to as much as 30% of the home value. At a home price of $100,000, this equates to $15,000 to $30,000 dollars.

Whereas the one to two months’ rent for an equal value home would be around $1,000 to $2,000 dollars. The total cost of home ownership should also be looked at when deciding whether to buy or rent a home. A home purchased for $100,000 at 4. 75% interest rate on a 30-year fixed loan would cost the homeowner $187,792 after paying the entire loan. Add the loan amount to the annual maintenance cost of the home over the same 30 year span, $56,085, equates to a total cost of $243,876. This does not even take into account the taxes, insurance, and other miscellaneous cost of owning a home.

Assuming the home value increases on average 4% a year a $100,000 home would be worth about $311,865. A few major repairs; new roof, new appliances and remodels to keep the home up to style could erase the $67,989 potential gain. Whereas a renter could expect to pay $267,750, figuring an average of 2% increase per year on rental fee, over the same time. Either way the homeowner or renter pays roughly the same amount at the end of 30 when all costs are taken into account. The renter just does not have to deal with the headaches associated with owning a home.

The economy can also have an impact as to whether it is better to buy verse rent. During an economic down turn such as being experienced currently, the benefits of renting are even more pronounced. If a renter suffers a loss of employment and can no longer afford their rent they can more easily move to a place with lower rent. Whereas the home owner cannot move to a lower cost home until they can sell their current home. This could cause a serious financial problem over the long term if they cannot make their payments until the home sells.

The home owner could lose their home to foreclosure and suffer a loss of all the money they have put into the home. Also if the homeowner can make their payments during the process to find a new job, they are limited to searching for a job in the area their home is located in. Whereas the person who rents is free to look for a new job anywhere. This gives them an advantage in finding a better paying job, not just one that can enable the homeowner to make their home payments.

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