The decision between home-ownership and renting is a personal choice that depends on various factors such as financial situation, lifestyle preferences, long-term plans, and local real estate market conditions. Both options have their own advantages and considerations. Let's explore them.
Advantages of Home-ownership
Investment - Owning or purchasing a home can be a good long-term investment because it can appreciate. If you buy a home for $100,000 and sell it for $125,000 two years later, your “investment” appreciated. Your mortgage loan goes down with each monthly payment and the value mostly goes up and when you eventually sell you pocket the difference.
Wealth Building – We buy or rent because we need a place to live, but even though housing markets fluctuate just as the stock market does, we can build some wealth in accelerating housing markets. My wife and I bought our first home in 1994, for $88,000, when we lived in California. When we sold it in 2001, we sold it for $135,000. We put $40k down on a $190,000 home and sold that home 2 ½ years later for $353,000, (it was prior to the financial crisis of 2008). Our first purchase and sale did not create generational wealth but did allow for a decent down payment on our next purchase. But a roughly $200,000 profit on our second purchase gave our net worth a much-needed infusion of wealth. When you sell and repurchase in the same region, your next purchase is also relatively priced. But when you move from CA to KS you purchase at a much lower cost of living (at least we did then). Our home in KS was twice the size for almost half the price. We sold that KS home 7 years later and when you factor in costs, we lost money on that home even after owning it for 7 years.
Control - Owning a home allows for stability and control over your living situation. My mortgage payment remains the same for the term of the mortgage loan. Rents can go up every year. (To be fair the payment you make on a mortgage does go up, but it is because of taxes and insurance going up). If I want to repair or improve my home, I don’t need anyone’s permission, I am the landlord. OK, I do need my spouse’s permission.
Potential tax benefits - At many times and in many countries, you might receive a tax deduction on the interest portion of your mortgage payment. The Trump tax bill of 2017 precludes most from claiming this deduction currently. The standard deduction was doubled, and most can’t itemize their deductions to a large enough amount to make it worth it to itemize. These deductions can help you reduce your tax liability. Even though it doesn’t make sense for most to itemize currently, the TCJA of 2017 sunsets or expires in 2025, only 18 months away and itemizing including your mortgage interest might make sense again soon.
Advantages of Renting
Flexibility - Renting allows you to move when you wish (for the most part) without having to sell a property. We have some friends who one spouse took a better job in Boston, but the other spouse has not been able to join them because they can’t sell the house in Kansas City. So, they have a mortgage and rent at the same time. Long term it might still work out to the positive, but currently it is an uncomfortable financial situation which a renter would not have to be concerned about.
Lower upfront costs - Most home buyers will need a loan which can require a down payment of as much as 20%. With the median home value in KC at approximately $280k that is a $56k down payment. Costly. There are also property taxes, which if you live in the KC metro you know the discussion going around currently about the property tax increases. Mine are up almost 20% over last year. Not to mention homeowners’ insurance, which also goes up every year. Also, maintenance and repairs if you own and you pass them on to the landlord if you rent. Most renters must come up with two months' rent and a deposit, but that should be far less than the initial costs for a home purchase.
Financial Risk - We’ll refer to equity and wealth building for this next discussion. When we left California, it was near the peak of the housing bubble that would lead to the 2008 housing bubble financial crisis. The person who bought that house for $353k lost their job and couldn’t afford that 2004 mortgage payment anymore. Their loan was let’s say $353k (they were a veteran, and a VA loan does not require a down payment), but the new purchase price was $220,000. They were on the hook for the $130 THOUSAND Dollars, which they couldn’t afford. (It’s easy to see why now how there was a collapse). That is an extreme scenario. Homes go up in value more often than they go down in value. But a cost that can be devasting financially. Another cost that can be high is repairs. We had a reverse osmosis water system that cracked back in November. There was $42k in damages. After the deductible, which was $4,500, insurance only covered $25,000 which still left $12,500 for us out of pocket. That’s $17k we hadn’t planned on spending in 2022/23 but we had to. If we rented and the RO system leaked the owner would be responsible.
Ultimately, the choice to own or rent depends on your personal situation. What are your long-term plans, the regional housing situation currently, and your lifestyle preferences? These all factor into your decision to buy a home or rent.
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