- I was a homeowner, but I decided to go back to renting because it better suited my lifestyle.
- Homeownership has many hidden costs, including maintenance, and a rise in value is not guaranteed.
- With renting, your costs are fixed for the term of your lease, and you have more freedom to move.
- Read more stories from Personal Finance Insider.
Homeownership is considered the American Dream and a sign of financial security. Many consider homeownership as one of the primary ways to build wealth. These concepts have been ingrained to the point where we’re conditioned to see owning a home as superior to renting.
Last year, I wrote about my experience with homeownership and my decision to sell my home in favor of renting. I quickly learned how polarizing the topic can be — and I have the hate mail to prove it.
Here, I’d like to cover some of the arguments for homeownership and against it, and how they contrast to renting. (To clarify, the points I make refer to purchasing a home as your primary residence, and I don’t cover real estate as an investment.) For many people, I think renting makes a lot more sense than buying a home.
The hidden costs of homeownership
You might not be building as much equity as you think
The central argument against renting is that you are building equity by owning a home. While this is true, home equity comes from two major sources: principal payments and increases in the home’s value.
Consider the cost of interest
With traditional mortgage amortization, you pay more interest than principal at the beginning of the loan. It typically takes about 10 years before you can build meaningful equity from principal payments alone.
The value of your home might not rise much
We have no control over the housing market and there’s no guarantee that the value of your home will increase. In the last 125 years, US home prices have increased 3.2% per year before inflation and 0.3% after inflation. Of course, there are certain areas in the US where the growth rate is higher than the average. This figure also neglects time periods like the last year, when we saw a staggering increase compared to historical performance.
Your renovations might cost you more than they’re worth when you sell
A third way to build home equity is through renovations. Whether you purchase an older home or stay in a home for a long time, you’ll probably need to invest in upgrades. There’s no guarantee that investments in your home through renovations or regular maintenance will increase its value.
The cost of owning a home isn’t stagnant
Another argument against renting is that rent payments go up each year while mortgage payments stay the same. But that’s not necessarily true. A mortgage payment usually consists of four parts: principal, interest, property taxes, and homeowners insurance. The principal and interest payments are the only amounts that do not increase. If your home increases in value (which we hope is the case), property taxes will increase accordingly. Insurance costs will also increase over time.
People who compare rent payments to mortgage payments often forget to factor in the total cost of homeownership. In addition to property taxes and insurance, there are maintenance costs, repairs, homeowners association (HOA) dues (if applicable), and renovations. Over a decade, these costs can easily add up to tens of thousands of dollars. When you pay off your mortgage, these monthly outflows don’t stop.
It costs money to buy or sell a house
The other hidden costs of homeownership that many fail to factor in are acquisition costs and selling costs. When you purchase a home, you pay a down payment, closing costs, and possibly upfront repairs to get the house in living condition. As a renter, your only upfront costs are administrative fees and a possible deposit.
Selling a home also comes at a cost. At a minimum, sellers are responsible for paying realtor commissions (typically 6% of the home’s value). If negotiated by the buyer, sellers could also pay closing costs, repairs, and other expenses before the sale is final. The process can take several months from start to finish. Breaking a lease is much easier and less costly. Most landlords require 30 to 60 days’ notice and the penalty is typically one month’s rent.
Homeownership is a great option for many, but it should be considered carefully. The decision to buy a home as a primary residence is not an investment; it’s a lifestyle choice. Investment assets either appreciate in value, provide income, or both. A home requires ongoing cash flow to maintain.
There are many financial — and non-financial — advantages to renting
Your cost of living is fixed for the duration of your lease
There are many advantages to renting. Compared to homeownership, renting provides more predictable expenses. Since you don’t have to worry about maintenance, repairs, and renovations, you’re better able to predict your monthly housing costs. Yes, your rent can increase over time, but the cost is fixed for the duration of your lease. The absence of these additional costs means you have fewer responsibilities. When something breaks, you can call your landlord to fix it. Your landlord is also responsible for regular property maintenance.
You have the flexibility to move whenever you need to
Renting allows for flexibility. As a renter, you can move quickly and easily for any reason. If you have to relocate for a new job, or decide you want a change, breaking your lease is quick and inexpensive compared to selling a home.
You can take the cash you’d spend to maintain a home and invest it in higher-performing assets
An advantage of renting that’s not often discussed is the opportunity to invest in higher-performing assets. When you rent, you don’t have to worry about saving for a down payment, covering maintenance and repairs, and paying commissions and closing costs when you move.
Instead of putting these costs into a home, you could invest this additional cash in the market. If the cost of renting is lower than the cost of homeownership, you can also invest that difference. Since the average stock market return is about 10% per year for nearly the last century, those investments have the potential to outpace the growth of a home.
When does renting make more sense?
As I mentioned, the decision to rent or buy is more than a financial calculation, and there’s no right or wrong answer when it comes to your preference. If you’re unsure how long you want to stay in a particular area, renting could be a better option. Generally, experts suggest that you should plan to stay in your home for seven to 10 years when you buy.
If you frequently travel, either personally or for work, you might prefer less responsibility and opt for renting. You may also enjoy having access to amenities like a pool or fitness center that you would otherwise pay for through HOA fees.
Finally, consider where you want to live. Are you in a major city where home values are out of reach? Do you prefer to live in a walkable area near shops and restaurants? Renting could be more affordable than owning a home.
Buying a home is a significant financial commitment, and in many cases, it’s your largest purchase. Don’t feel pressured to purchase a home because you feel it’s the “right” thing to do and you’re throwing money away by renting. The decision is about more than money. Think about the lifestyle you want, your financial goals, and what works best for you.