Sometimes renting makes more sense than buying.
There’s been a lot of debate in the blogosphere lately about renting vs. buying a home. Millionaire Mommy Next Door touts renting as one of the ways she has amassed so much wealth. Paidtwice was confused as to how renting could be a good deal for both the renter and the landlord. Yesterday Paidtwice ran a guest post by Mike at Money Smarts Blog on real estate investing. Catherine Schaffer of Wise Bread left the following comment (in part):
…Your basic thesis is that landlords are stupid. You can believe that if you want, but most landlords tend to believe the same thing of their tenants.
Now I’m not sure that most landlords think their tenants are stupid (after all, my landlord thinks I"m a genius for fixing a garbage disposal with baking soda and vinegar). But there does seem to be a misconception out there that renters are just throwing their money away.
I’m not saying buying a house is bad, but there are plenty of situations in which renting a home is a better idea then buying.
1. When you can’t afford to buy with a fixed rate mortgage and a 20% down payment. Buying a home is a good thing under the right circumstances. However we’re obviously seeing the fallout from mortgages being approved for people in the wrong circumstances. If you buy a home with nothing down, take out an interest only or adjustable rate mortgage, you’re taking a big risk.
If the housing market fluctuates slightly downward, you can easily end up upside-down in your house. When the interest rates adjust upward, and you have no equity in your house, selling isn’t a great option, because you owe more than it’s worth.
2. When the difference between rental prices and home prices in your area is so great, that you can make more money investing the difference than waiting for your house to appreciate. Traditionally, the stock market does better than home appreciation values. If rents are much lower in your area than mortgages, you might be better off to rent and invest the difference.
3. When you move around frequently. It’s difficult to recoup the costs associated with buying and selling a home if you move every few years, as is the case for military personnel. If you aren’t going to live in your house very long, it’s usually better to rent.
4. When renting allows you to live in an area with better opportunities. Right now we fall into this category. We live in a great school district and a very safe small town. We can walk to the local grocery store, library, parks, friend’s houses…even to Walmart. If we were to buy a house, we could only afford a house in one of the worst areas in a neighboring city. We pay less than we would for a mortgage, our children are able to go to school in one of the best districts in the county, and we live in a safe neighborhood. That wouldn’t be possible if we were to buy right now.
5. When buying a home would stretch your budget beyond your comfort level. Even if you have 20% down and are able to qualify for a fixed rate mortgage, sometimes it may not be best to buy. If your mortgage, property taxes, HOA payment, and estimated costs of repairs puts a serious strain on your budget, you have to evaluate whether it’s worth it to buy a home at this time. If you stretch your budget too much with your home costs, you may be sacrificing other financial goals, such as saving for retirement, saving for your children’s college educations, or other financial goals you may have.
We will be renting for the foreseeable future. We don’t have a down payment, the mortgage payment alone for homes in our area is twice what we pay for rent each month, and that’s before taking into account other home related expenses.
We’ve developed a good relationship with our landlord. He lets us do what we want with the yard, and he’s agreed to let me paint the interior of the house, too.
Because we rent, we don’t have to spend a lot of time on little maintenance projects. We do what we can, but for anything big, we call the landlord. When the tree fell over in our yard a few years ago, it was nice to not have to figure out what to do with it. And if something like this ever happened to us, the landlord would have to deal with it. Not dealing with routine maintenance gives us the freedom to spend more time together as a family on weekends.
Will we ever buy a home? I don’t know. If we have a huge down payment and can get a good fixed rate mortgage that we will someday be able to pay off in full, I suppose it’s possible.
For now, though, we’re going to enjoy renting. And who knows? We may rent forever. Though there are definite benefits to owning a house, renting has it’s own set of benefits. Whether to rent or buy is a highly personal decision, based on your own priorities in life.
I think the "you’re throwing your money away if you rent" argument is a little overrated. Perhaps you’re not gaining equity in your home, but you might be gaining more in investing income, more in your family time, and more in life energy, to borrow a term from Your Money or Your Life.
For the time being, I’m going to buck the trend and be a proud renter.
Do you rent or own your home? If you rent, do you ever feel pressure to buy? If you own your home, was it the right choice for you?
Photo by Editor B.
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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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