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Today, we have a guest post from CJ the Money Guru. CJ launched his personal finance blog in July 2017. His goal is to reach financial independence within the next two years. He has paid off over $722K of mortgage debt in a year and a half.
Are you thinking of buying a home? I believe everyone thinks about becoming a homeowner at some point in their lives. It’s a very tough decision to make. This is why I’ve decided to write about the benefits of renting vs. owning a home.
When I first moved out of my parents’ house, I rented an apartment for two years in Manhattan. But now I am a homeowner, so I know exactly how it feels to be on both sides of the coin.
The grass always seems to be greener if you are either one or the other. If you have been pondering the thought of renting vs. owning a home, I have compiled a helpful list for you below that highlight the pros and cons of both.
I do know one thing for sure. If you live in an expensive city like New York and you happen to be one of the lucky few that have a rent controlled or rent stabilized apartment, then hands down stay there forever.
You will never find a better deal than the one you have now. If I had a rent-controlled apartment in New York, I would not even bother buying a home, unless it was an investment property.
My coworker lives in a rent-controlled apartment that was passed down to him by his mother. He pays about $800 month for it. This is a steal of a deal because the market price for his apartment would be at least $2500 month.
The market price of his apartment will just keep increasing with time. It’s basically winning the lottery if you have a deal like that.
But I also know many people acquire their wealth through home ownership. It is part of the American Dream after all. It’s one of the biggest reasons why people go to work every day. So that they can finally purchase a home and become a homeowner.
Pros of Owning a Home
It’s one of the best investments you can make
My parent’s home has appreciated in value over 15 times in 40 years. They purchased their house in 1975 for $60K. We just had it appraised and it is worth over $900K today. In fact, most homes in my parent’s neighborhood sell well over the million dollar mark today. This is crazy to believe because when they first moved in, it was more of a working-class neighborhood.
Even if you are paying a huge mortgage (like I am), it’s like you are paying yourself instead of paying rent and making your landlord richer.
Depending on the area you buy in, real estate prices will always increase with time. But I’ve lived in NYC my entire life so that is definitely the case here.
After the 9/11 tragedy, real estate prices dropped for a very short time in NYC. But they bounced right back up within a month. The real estate industry is resilient, especially in dense urban areas.
You can write off the interest from your mortgage on your income taxes
Many people do not like to pay off their mortgages because of this tax benefit. I think it’s arguable, but this strategy can work for some. It may work better for someone still working and receiving a steady income.
But if you are retired or your income fluctuates, paying off your mortgage may be the better option. What are your thoughts on this?
You can pass down the home to your kids or your loved ones after you die
Many people acquire their wealth by inheriting real estate properties from their family. They either sell it at a much larger price or they can decide to rent it out. They can also choose to live in it. All they have to do is pay the property taxes and utilities.
Either way, when someone inherits property, it could be like winning the lottery for them. Imagine not having to worry about paying a mortgage. You can do whatever it is that you want.
You can take out a Home Equity Loan
I do not recommend doing this. But it’s nice to know you have this option.
You can rent out your home and have a passive income stream coming in. That is if you have another place to live in
You have a place to grow old in, establish your roots and have a place to call home
Once you pay off your mortgage, you will own your home outright. Nobody can ever kick you out
Cons of Owning a Home
You need to have at least 20% cash saved for the down payment
I would not purchase a home until you have at least a 20% down payment on it. You will also need at least an 8-month emergency fund on top of that.
If you put down less than 20%, the bank will require you pay PMI (Private Mortgage Insurance) If that is the case, save more money until you have the 20% down payment or look for a more affordable home.
You have to pay for closing costs when you purchase a home, and they are not cheap.
Closing costs are typically 2 to 5 percent of the purchase price. For example, if you are planning on purchasing a home that cost $350K, expect to pay $10K just for the closing cost. On top of your 20% down payment.
You are completely responsible for replacing and paying for everything that breaks in your home
Placing a new roof on your home can cost you upwards of $10K. If plumbing needs to be replaced, that can cost you several thousands of dollars. The pipes underneath my parent’s house need to be replaced. We just got a quote for $30K to fix it! Ouch.
You have to pay for the upkeep of your property. You are responsible for paying for a new roof, pipes, gutters, landscaping, snow removal etc.
If an act of god happens like a hurricane, tornado, flooding etc. Your home and investment can literally be wiped out
Houses that are in designated flood zones are required to have additional flood insurance. When disaster does strikes, this will be no picnic for anyone. Not to mention the pesky cost of additional home insurance on top of the one you already need to pay.
You may not be able to sell your home quickly if you need the cash
Depending on where you live, it may take a long while to sell your home. Also, many people are flakey. Deals can always fall through at the last minute in real estate. Nothing is final until the check clears the bank. Always remember that.
At my home closing, the bank actually called my place of employment to ensure I still had a job there that day. The banks do not want to take any chances that the borrower will default on the loan. Even on the day the loan is finalized.
There are places that I know of where a house has been sitting on the market for years and still can’t sell.
It can be a lengthy process to sell your home. You can’t just pick up and leave whenever you want. In other words, you are tied down to your home until you sell or rent it out.
You have to pay property taxes, insurance, common charges, maintenance, HOA Fees every year/month. And they only increase as the years go by
When I moved into the first apartment that I purchased, my maintenance charge was about $350 month. 12 years later, it was up to $800 month and growing. That is a 128% increase!
Pros of Renting a Home
You are not tied down if you rent a home, you can pick up and leave and go whenever and wherever you want
Renting is great for people who travel often or move around a lot for work. Why deal with the hassles of buying and selling a home if you know you will be in a location temporarily?
However, there could be financial consequences to you if you break your lease.
I also do not recommend owing a property and renting it out if you live far away from it. This can lead to many headaches and trust issues with whomever you hire to manage your property. I would only own investment properties that are close in proximity to where I live.
You are not responsible if something breaks or floods in the home (unless you caused the issue)
It’s comforting to know that if all hell breaks loose, it won’t be your neck on the line when disaster strikes your home. It’s the home owner’s responsibility to pay for and repair whatever breaks within the home.
But the renter is responsible for their own personal property. This is why I highly recommend all renters purchase renter’s insurance.
But if the tenant is the one who caused the issue, it will be their responsibility to repair and pay for the damages.
You can negotiate with your landlord on the price of your rent
When the economy is in the toilet (remember 2008) and you’ve been a good tenant. You will have the opportunity to renegotiate the price of your rent during the renewal period. In this case, you will probably get to pay a lower rent amount.
Your landlord does not want to lose their passive income stream, especially in a bad economy. If you’ve proven to be a cooperative tenant, your landlord will be more than willing to make sure you stay put. Even if that means lowering your rent.
However, if the economy is booming, be prepared to pay a higher rent amount when it is time to renew your lease. In NYC, rent usually increases 3% a year no matter what.
Doesn’t a rent controlled or rent stabilized apartment sound good right about now?
You don’t have to pay any hefty closing costs before you move in
When you rent a home, most people just have to pay the first and last month’s deposit. This amount is pennies compared to the closing costs you would need to pay when purchasing a home. As I’ve stated earlier.
Cons of Renting a Home
You are paying rent which means you are making your landlord rich
When you pay rent, you are building zero equity for yourself. But your landlord is. The renter’s rent money helps the landlord pay off their mortgage and then some.
When you move or get kicked out of your rental, you have nothing to show for it. All the rent you paid went into somebody else’s pocket (your landlords’).
You are subject to rent increases every year
This is especially true if you live in a white-hot city like San Francisco, New York, Los Angeles, Austin, and Denver.
Your landlord may not renew your lease after it ends which means you have to find a new place to live. And moving is such a pain the a**
This usually happens if you never pay your rent on time or you’ve just made a complete mess of the place. Or your landlord could just hate your guts for any number of reasons.
In any case, moving is a huge inconvenience. If you don’t have friends or family to help you, moving all your stuff from one place to another can get very expensive.
You get no tax benefits when you pay rent
The rent you pay for your home is not tax deductible, unless you conduct business in it. Contact your tax professional to get more info on that.