For most people in America, their home is the largest purchase they'll ever make. Most of the time, home ownership can become a really great investment, while in other situations, it could make more sense to wait and rent an apartment instead. While the debate about whether America should be owning their homes, or renting them has been going on forever, I'm not sure if anyone has ever just broken down the facts. If you read to the end of this article, you'll have a basic grasp on the pro's and con's of owning vs. renting.
Reasons to Buy:
Appreciation - Generally, when you purchase a home that is within your means, you get to benefit from appreciation. Appreciation essentially means that every year, your home will increase in value creating a nice chunk of change that you can tap to do other things with. Appreciation has historically been 3% a year, which may not sound like much, but on a $200,000 home, that's $6,000 a year! In some markets, home prices increase significantly faster. Several homes that I purchased in UT increased in value by roughly 18% each year for several years.
Cheaper Payment - While interest rates are low (under 5.5% in my opinion), money is cheap. This essentially means that the cost of borrowing money is low. For example, if you can make an average return on your money of 10% annually, and you borrow money at a 5.5% interest rate, you have the opportunity to make 4.5%, without having of your own money into the deal. In terms of housing, and primary residences, this equates to a low monthly payment. With rents increasing every year, it is actually becoming cheaper to purchase a home, instead of renting one. For example, a $200,000 home I owned rented for roughly $1,800/month, while my payment on that same home was only $1,280/month. If my tenants purchased that home for the $200,000 it was worth, they would be saving roughly $520/month.
Principal Pay Down - Every time you make a rent payment, that money is gone. Traded for the month that you will live at that property. However, every month that you make a mortgage payment, you pay down the balance you owe on your mortgage, essentially putting that money back in your pocket with you sell or refinance.
Ownership - The best part about owning a home is having control over it. You can do almost anything you want with your home. Paint it whichever color you like, plant trees in the yard, hang things on the walls, etc. Home ownership also gives you a few other benefits that most people don't account for. When you own your home, you have significantly more influence in your community and city. You also have private property rights that you can use any time to deal with strangers, or law enforcement.
Lower Down Payment - Most people believe you have to put 20% down when purchasing a home. However, there are very common loan programs that allow you to purchase a home for 3.5% down. There are even programs that require $0 down.
Asset - If you buy a home within your means, that you can afford, and you can improve, what you're really purchasing is an asset. If you can't afford the home, you purchased the nicest home on the street, or you're purchasing in an inflated market, what you're really buying is a liability. Assets make you money, liabilities cost you money. Typically, homeowners have a significantly higher net worth than their renting counterparts. This chart from 2017 shows how much equity factors into an individuals median net worth. There are also studies that show that homeowners had a median net worth of almost 44x higher than those who rent. That number is a little bit skewed by the number of very wealthy who own homes, but it does show that the wealthy generally believe in property ownership.
The number on the left is the net worth of a homeowner, and the number on the right is the net worth of that same person, minus the equity in their home.
Leverage - When you have a chunk of change being held somewhere, it's nice, but it doesn't really benefit you if you can't use or access it. If you have $3,000,000 in stock, but you can't sell it, that money is worthless, and if you do sell it, you no longer have the stock. Equity is a little bit different. Real Estate is considered a hard asset. It's something you can touch and feel, and so people feel more comfortable lending on it. If you had $40,000 in equity, and you needed some of it, but didn't want to sell your home, you can get a line of credit (LOC) on your home, allowing you to use that equity without selling your home. You have to pay the money back of course.
Taxes - This is a big one. When you own a home, there are two major tax benefits you get to reap. The first is that if you live in your home for two of the last five years before you sell it, your first $250,000 is completely tax free. If you're married, it doubles to $500,000! If you made that money working, you would pay $37,500 - $62,500 on $250,000 just in taxes! If you need something else to sweeten the deal, each year you get to write off the interest that you pay on your mortgage. While there is a cap on mortgages more than $750,000, most people aren't purchasing million dollar homes. This write off essentially lowers your monthly mortgage payment even more.
Reasons to rent:
Grant Cardone Says So - I actually agree with the premise of what Grant Cardone preaches. Essentially, rent where you live, and own rentals that you can rent to other people. Essentially, one generates monthly revenue, and one doesn't. When you're renting, you have the ability to move a little more freely throughout the world, and you're not signing up for a monthly payment that you have to make for 30 years. I own plenty of rentals, and I actually still rent the apartment I live in from another landlord. This is mostly because the rent's I charge are higher than the rents this landlord charges. Some days, I definitely hate having a landlord and not being in control of my own residence, but renting allows me to stay fluid and mobile in my business.
Lower Barrier of Entry - When you rent an apartment, the only money you need to produce, is the security deposit, and the first month of rent. When you purchase a home, you will often need some sort of down payment to put down. 3.5% down payment on $200,000 is $7,000.
Taxes - When you rent an apartment you don't receive any tax benefits for doing so, however, you also don't need to pay property taxes. Depending on where you live, property taxes can be anywhere from $100 - $300/month. You do kind of indirectly pay property taxes through your rent, but that's a different story.
Repairs - When a something breaks, or happens to property that you own, you're the one responsible for fixing it, and that can be costly. When you're a tenant, it's the landlord's job to replace/repair whatever is happening in the apartment.
Inflated Home Values - When the market increases so high that homes are selling at a higher price tag that they're worth, you're witnessing an inflated market. A good indicator of this is when it becomes cheaper to rent than to buy. For example, when people are buying rental properties that will cost them more than their tenants will pay in rent each month, there is a problem. If you own the property, then awesome! Sell that sucker ASAP. If you're looking at buying, wait for a correction to happen, and then ride the next wave. Otherwise, you could be stuck with a dead horse.
Lower Risk - When you rent an apartment, you have a lower risk in regards to what you're on the line for. For example, if you own a home, and you lose your job and can't make payments, they're going to trash your credit, and possibly even foreclose on your house. When you rent, the worst that can happen is that you will be evicted. You can even just leave and avoid the eviction all together... although the landlord could still sue you in civil court to enforce the contract. Long term, your credit will be fine, and you'll only be hurt in the short term.
Opportunity Cost - Though there is significantly less opportunity cost when you're purchasing homes at a lower price point, you should still be aware. Opportunity cost is essentially the opportunities that you are missing out on because of other things you've chosen to do. In this case, if you put $7,000 down on a house, the opportunity cost is everything you could have done with that $7,000. Maybe you could have invested it in the stock market and doubled your money? Who knows. When you rent, you don't have as much of that up front opportunity cost, although you probably do have a higher monthly payment.
Overall, I'll always advocate for home ownership in America. When it takes such little money to purchase a home, and you can always turn it into a rental if you have to move, it seems like a no-brainer to me. All you have to do to make money in real estate is hold onto your property for long enough. Private property is a corner stone that the free market, and our economy relies on. If you want to make money in this country, you must be willing to take risk. Risk VS Reward is very high in my opinion when it comes to purchasing a reasonably priced home that you plan on holding long term. If you learned anything from this article, please subscribe up top! Leave me a comment! Suggest a new topic for next week! Follow us! Facebook: https://www.facebook.com/DWinvestors19
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