Are You Throwing Away Money by Renting? Maybe Not
It’s something we’ve all been told for so long we don’t even question it: if you’re paying a mortgage, you’re making an investment; if you’re paying rent, you’re making a mistake. But is it true? Are you making your landlord rich at the expense of your own wealth? The answer’s not as simple as you might think – for a lot of people, and in a lot of situations, paying rent is the smartest thing you can do.
The following suggestions are for people who are thinking about buying a house to live in. If you’re hoping to flip houses, or to buy houses to turn into rental units, you have an entirely different set of pros and cons to weigh.
Feeling the need to roam? If you buy a house and try to sell after only five years, you’re in for a nasty surprise. Those five years of mortgage payments that you thought would build equity? Nope. More than 80% of that money went to interest payments. And the small amount that didn’t will be eaten up by the cost of selling your house. In addition, once you factor in unforeseen repairs, taxes, and regular maintenance you’ve paid a lot more for that roof over your head than a renter would have.
Think the boss is going to figure out you’ve been stealing pens? If you’re a little unsure about your work stability the last thing you need is a mortgage hovering over you. Rent provides flexibility in uncertain times. Not only are rent payments lower than mortgage payments but if things get tight you can opt for a less expensive apartment. If you can’t make those mortgage payments and are forced to sell you’re at the mercy of the market, and that might lead to a huge loss.
What goes up… In some small, exclusive markets – like, say, most of the United States – real estate prices have gone through the roof (pun intended.) Not only does this put mortgage payments out of reach for many people, but it also means that people who can buy are taking larger and larger risks. A house that has gone up 10% a year can’t keep rising indefinitely – it’s basic math that if prices rise faster than incomes then at some point there has to be a correction. In fact in many regions prices are starting to slump. A lot of homeowners who planned on selling their new houses for a quick profit are now finding themselves stuck with mortgages they can’t pay, hence the skyrocketing number of foreclosures in the past year.
What didn’t go up. While housing prices soared, rents merely chugged along. Between 2004 and 2006 home prices nationwide rose 16%, while rents inched up just 1.2%. If you can satisfy your needs by renting a house at $1000 a month instead of paying a $2500 a month house payment then that’s $1500 a month you can invest in the stock market or elsewhere. Add the $10,000 or $20,000 you would have put up for a down payment and that investment turns into a healthy nest egg. After a few years if you decide it’s time to buy a house then you have enough saved for a healthy down payment.
The unintentional indoor waterfall. Pipes burst. Refrigerators stop working. Termites decide they love your taste in support columns. If you think you have just enough to get a house, you don’t have enough – things will go wrong. The rule of thumb is that the average homeowner should set aside 5% of the purchase price to cover maintenance and repairs. And don’t forget utilities; 4 bedrooms, cathedral ceilings and picture windows all seem wonderful until you get that first heating bill.
If you have to ask, you can’t afford it. Even with the massive defaults of sub prime lenders (companies providing home loans to risky, low income borrowers) there are still many companies offering loans to people who are not financially qualified. Your monthly house payment - including taxes and insurance - should probably equal no more than ~33% of your monthly income. Your total bills should not exceed ~38% of your total pay or you are risking payment problems later and will likely not be able to save money. Even if a lender says you have enough income, decide for yourself.
So just remember, even if you dream of home ownership you need to make sure the time is right for you. For some people waiting even a few years can mean the ability to buy with more stability in their lives, a larger down payment, and lower prices in a buyers market.