Should I Rent or Own?
If you're debating if it's the right time to buy a home, this newsletter is for you.
We're going to break down Renting vs. Owning.
The good, the bad, and the ugly of both.
If you're already a homeowner, read through this and let us know if you think it's worth it. Then, share it with someone who should read it.
Let's start by breaking down the benefits of each...
Benefits of Renting:
- Low barrier to entry
- No major repair expenses
Benefits of Owning:
- Potential to build equity
- Tax Benefits
- Fixed Payment (usually)
- Make it your own
There are more benefits to each, but these are the major ones. A benefit to renting is often a negative of owning and vice versa. When deciding on what is better for you, looking at your long-term vision is important.
There are tons of different places you can go to see more of the obvious surface-level pros and cons of renting vs. buying. I want to share the benefits of each that most people don't consider.
Renting as a Choice
There seems to be a negative connotation when it comes to renting. Especially when you consider the term 'pride of ownership'. Yet, there are some major reasons why renting might make more sense.
In more expensive areas, renting is typically less expensive than owning. But, less expensive is relative. Most people will have a budget for housing. That would either be a mortgage payment or a rent payment. In my experience as a real estate agent, I've found this to be true.
When you budget $6,000 per month for housing, you'll be able to rent something much 'nicer' than you'd be able to buy, at least under 'normal' circumstances.
There are a lot of people who choose to live in the 'nicer' home/area, and there is nothing wrong with that.
Renting allows you to be flexible with your home. You can move every year to a new city without incurring a ton of costs. With flexibility, you trade stability. Knowing that your landlord could sell the property or raise rent at the end of every contract.
Renting also allows you to ignore the expenses of maintenance as well as the cost of major repairs when they come up.
When you look at renting vs. owning, those who say owning is better will show the financial difference between the two. While the financial benefits are strong, which we'll get to in a minute, there are other ways to invest your money.
The trap many renters get into is similar to the trap homebuyers fall into. Spending more than you should. If you're choosing to rent, you're choosing to pass on the benefits of homeownership. Make sure that you're investing in something that will balance that missed opportunity.
Choosing to Buy
As I mentioned above, there are a ton of financial benefits to owning a home. There are also more risks involved. It is easy to overlook the risks, so I want to ensure I lay them out with the benefits.
Let's break down the actual costs of owning a home before talking about the benefits.
There is a term that you'll want to know if you're buying... PITIA.
It stands for...
P - Principle
I - Interest
T - Tax
I - Insurance
A - Association
These will total up to your monthly payment for the home. So you'll have PITIA + utilities.
If you are renting, you have rent + utilities.
Principle and interest are what make up your actual mortgage payment. This is the amount that goes to pay down your loan plus the interest.
Here are the first two benefits.
P - Principle
1) Principle pay down is like putting money in a savings account. That savings account is your home's equity.
Equity = Value of the home - Loan balance on the home
I - Interest
2) Interest is tax deductible. I can assure you if you can afford to buy anything in SoCal, you need a tax write-off.
** I AM NOT A CPA... If you're considering buying a home (spending a lot of money) please talk to your accountant. **
This means that the money you're paying in interest will lower your taxable income. Which means you'll pay less in income taxes every year. That's a good thing. This can be a LOT of money, which is why I say to talk to your accountant.
T - Taxes
Everyone's favorite topic. We just talked about how you will save in taxes, but here is how you'll also pay taxes. Property tax in CA is 1% of the home's value. You will be paying this forever.
The only good news here is that property taxes can also be tax deductible.
** I AM NOT a CPA... If you're considering buying a home (spending a lot of money) please talk to your accountant. **
I - Insurance
Insurance is rather self-explanatory, and there isn't a benefit here. This is risk. Your homeowner's insurance is to protect you from worst-case scenarios. Think of a major leak as an example. There is also extra insurance for natural disasters, etc.
I think we all understand insurance, so I won't spend too much time explaining it.
A - Association
This is IF your home is a part of a 'Homeowners Association'. There will be more costs to this as well. This will depend on what you're looking for, so I won't cover it here. This isn't a benefit of homeownership; this is a benefit of location.
The biggest benefit of homeownership is appreciation. This is also where the biggest risk comes in. Home values have "always gone up" historically if you look over a long enough time.
For Orange County, home values have gone up an average of 5% every year. That includes major drops, like in 2008. While a 5% gain might not sound like an incredible investment, remember... all the benefits mentioned are all happening at the same time.
Also, when buying a home, you're getting a mortgage. You may be investing 10% of your own money. But the appreciation happens on the entire amount, not just on your cash investment.
If you're planning on living somewhere for 5+ years, there are a lot of benefits stacking year over year.
Here's what I've learned...
Usually, those who choose to buy have decided that the financial benefits are worth the risk. They often buy a home that isn't as nice as they could have rented for the same price.
Most of the people who choose to rent fall into two different categories.
They have a personal reason that could cause them to need to move in a shorter amount of time. They would prefer to rent, so they have the flexibility.
This category is typically "saving up" to buy the home they want. They're not willing to or aren't able to afford what they want. The value of renting 'for now' is much better than buying something they don't like.
There is nothing wrong with either category, just like there isn't anything wrong with renting vs. owning. Everyone has to make their choice.
As a real estate agent, I make sure that all my clients understand the difference so they can make the best choice for them. I do what we call a Rent vs. Own Analysis, where we look at your situation. Schedule one here.
Our clients walk away knowing...
- All the costs of owning
- All the financial benefits
- A timeline of equity growth
The goal is to give you all the information you need to make the right decision for you.
If you are interested in a more in-depth look at renting vs owning, check out our rent vs own guide here.