Subscribe

Renting: Does it make financial sense for you?

The "one size fits all" mentality does not work for determine whether you should rent or buy a home. That said, renting a home has some upsides, such as not having the high costs of home ownership. 

  • close
    A sign advertising a house for rent in Los Angeles. The "one size fits all" mentality does not work for determine whether you should rent or buy a home, though renting may make more financial sense for you.
    Richard Vogel/AP/File
    View Caption
  • About video ads
    View Caption
of

“Paying rent is like flushing money down the toilet.” Everyone’s heard that one. It’s rare to have a conversation about buying versus renting without that old adage being thrown in. Something else you hear in these conversations is that buying a home is a good investment. The thing is, neither of these things is necessarily true. Like most things in life, it all depends on your situation.

There are certainly benefits to owning a home versus renting: You cannot be evicted (but you can be foreclosed on), you could make a profit if you sell at the right time and, if you stay long enough, your home will be paid off. However, there are many situations in which renting is the more reasonable strategy, in both the short term and the long term. Here are a few reasons why:

Building equity does not equal a good investment

Many people think that because you can build equity in a home, a home is a good investment. But you can build equity in your home for many years and still sell it at a loss. The amount of equity you have in your home has no bearing on whether you will come out ahead if you sell it. What matters is whether you can sell it for more than you paid for it, taking into account the costs involved in the sale, such as real estate commissions. You are at the mercy of the real estate market. Many learned this the hard way in the years following 2008.

The costs of ownership can be very high

When comparing the costs of owning and renting, people tend to consider only the amount of the mortgage payment versus a month’s rent. When you do this, owning often does look like the more economical option. But ownership carries other costs that are frequently overlooked.

Consider this typical assessment of the yearly costs of owning a home (as a percentage of the home’s value; percentages may vary depending on where you live):

  • 3 percent to 4 percent for mortgage costs
  • 1 percent to 3 percent for property taxes and insurance costs
  • 1 percent to 2 percent for repairs and delayed maintenance (such as a new roof)

I have a client who rents a home valued at around $450,000. He pays $30,000 a year in rent (or $2,500 per month). His landlord’s total costs of ownership are about 8 percent of the fair market value of the home, or about $36,000 a year. His landlord is essentially subsidizing him by $6,000 a year to live in the home. This situation is not uncommon for clients of mine who choose to rent rather than own.

Likelihood of being able to sell for a profit

If you’re thinking about buying a home because it is a good investment, consider that the historical long-term, inflation-adjusted returns of the US residential real estate market are around 1 percent a year. For perspective, the long-term historical returns of the US stock market are around 7 percent a year.

Cost of reselling

In addition to the not-so-stellar returns of the residential real estate market, the cost of reselling can be as much as 10 percent. This further erodes your chances of making a profit off of your home.

Intangible Benefits of Renting

Finally, there are many intangible benefits to renting that you can’t put a dollar value on. I choose to rent, and for me, the flexibility and ease of living it gives me are invaluable. I love the freedom of not being tied down — it gives me great peace of mind. I also love not having to worry about maintenance and repairs. My building’s maintenance service is just a phone call away, and they are able to come at a moment’s notice, regardless of whether I am home.

To sum it all up, do not listen people who tell you that renting is flushing money down the toilet. There are many good reasons to rent rather than buy, and you should thoroughly research the net cost of both options before making a decision.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK