Is it Better to Rent or Buy a Home? test

Homeownership became a widespread icon of the middle class in the post-world war II period with the expansion of credit, new house construction, and an unparalleled period of prosperity and wealth for the United States. It became apparent that homeownership was a vital part of the American Dream that we had created. Through the generations, we have perpetuated this idea: “Homeownership is the best way to build wealth in our society, but renting is a bad thing, and that it's throwing money away.” The standard line of thinking follows that there are so many things that you could gain from owning your own home that renting is not worth it.

Who Makes Money When You Buy a House?

Before we dive further into this topic, I want to challenge that notion. For you to understand where this mindset comes from, you have to follow the money trail. There are a lot of economic interests behind you buying a house and getting a mortgage.

Financial institutions benefit greatly from you being in debt for as long as possible. If you think about it, it is absolutely towards the lender's advantage that everybody gets as much house as they can get, for as long a period as possible, which is one reason we came up with a 30-year mortgage. When you look at the benefits multiple actors derive from the industry of lending, they're huge! Some people are selling you the house (realtors), people who appraise the place (appraisers), people who intermediate that loan (brokers), investors that purchase your loan packaged up as an investment to get a steady stream of income. There is an entire industry around the concept of owning a home that invests a significant amount of marketing year after year to convince you that homeownership is the absolute best and only choice if you want to be smart about money.

Is Owning a Home Good?

As a Christian, homeownership can be an excellent thing. If you look at the benefits of homeownership, there are many of them! First, it stabilizes your housing costs, so it allows you to control how much money you're paying to stay in the house for a very long period. It is also not a surprise that housing is one of the most significant wealth sources in our country and one of the biggest generational wealth sources. When you look at our society, the different groups of people and the socio-economic composition of homeowners versus non-homeowners is prominent that homeowners over the long term build a substantial amount of wealth and are then able to pass on that wealth to the next generation.

The downside of homeownership is real too. The cost of maintaining a house can be very steep. Depending on the type of place you buy and the construction’s age, the cost can spiral out of control. Although it is terrific and has its many virtues, homeownership should also be looked at from an economic standpoint to understand the best deal for you.

The Costs of Owning and Maintaining a Home

When you own a home, the monthly housing costs to stay in that home are called PITI. P for principal, I for interest, T for taxes, and I for insurance. That is the monthly payment, typically a fixed cost (at least as far as principal and interest payment). Sometimes your taxes and insurance, depending on the area and part of the country you live in, can fluctuate over the years. Still, primarily your principal and insurance will stay the same for the duration of your loan. After you cover the PITI, some other expenses come with homeownership. For example, if you live in a neighborhood with an HOA (homeowners association), you may have to pay an additional amount every quarter to maintain your membership in that association. All-in-all though, when people think about homeownership and its price, they usually think about the PITI monthly payment, and they also think about maintaining the house.

According to surveys, there's a rule of thumb that has been shared for a long time that you should allocate about 1% of the home’s value when you purchase it to cover the home’s maintenance cost over the long term. You should set aside that one percent every single year in the form of savings to replace large systems and be able to afford extensive repairs.

The Purpose of Renting

After looking at homeownership and its history and what it looks like to own a home, I think it's helpful to also look at renting and understand what you're doing when you're engaging in a rental agreement.

First of all, renters are shifting responsibility and risk from themselves to the landlord. Suppose you have an agreement to live in a house. In that case, you're only responsible for the typical caring of that property (so basically don't destroy it, and don't do anything intentionally to damage it). Still, you use the home for shelter, but anything inside that home is the landlord’s responsibility. If, for example, you rented the house, and the expectation was that your refrigerator was part of that rental agreement. If the fridge goes wrong, your landlord is going to be the one to get that lousy refrigerator out of your apartment and get a new one. You do not pay any extra for buying that refrigerator. There's also the fact that you will be purchasing rental insurance to protect YOUR belongings, so that is a different risk transfer. For this article, I want you to consider rent as transferring risk from yourself onto the landlord. When renters shift that responsibility, they gain the ability to buy patience, and that's what renting is all about. You are buying patience and essentially paying a form of insurance to protect yourself from the unexpected cost of homeownership.

Your landlord will gain a percentage of that payment as a form of profit because they are taking an increased risk that you're not, and that's okay so long as you understand that renting should not be a long-term plan. It would be best if you did not plan to stay renting forever, depending on a certain number of factors.

As you rent, keep your costs as low as possible so that you can save as much money as possible to purchase a property in the future. You're going to be saving for a down payment and improvements because the house you're going to move into is likely not going to have 100% of the things you and your family want. You may want to have some money set aside to make some improvements. You also want to save money for repairs because inevitably, in the first year of homeownership, several things will go wrong, and you're going to need to pay out of pocket to fix some of those things and make sure that your house is in good repair.

If you think about it, your rental payment structure is slightly different than a mortgage payment. It is very similar until we get to the potential profit your landlord is making in paying rent. When you're paying rent, you're doing almost the same thing you're doing when paying a mortgage. You are paying your landlord's principal, interest, taxes, and insurance. The difference is that there is an excess amount between what your landlord's carrying cost is and your rental payment that represents a profit for your landlord. Out of that profit, your landlord has to set aside money for maintenance, long-term repairs, vacancies, and compensation for putting their capital at risk. They deserve to have this compensation because they've engaged in economic activity with the hope of getting some return.

A Great Tool to Help You Decide

When you're looking at the idea of buying a house and comparing renting versus buying, the absolute best tool that I’ve seen is a calculator developed by the New York Times. This tool combines over a dozen factors to determine if it makes sense to rent a house or buy a home in your area in your life situation. I also leverage it as a Christian financial planner to serve my clients in order to compare the costs of ownership vs. renting in many areas across the country.

Conclusion

The decision is now yours! Whether you choose to rent or buy, make sure you understand the numbers and easily articulate why it is the best plan for you to move forward. Don’t let pressure from people around you force you to buy a house before it makes sense. As you navigate what will perhaps be the largest purchase you will ever make, do so with confidence that it will set you up for a bright future instead of a nightmare.

Leo Marte is a Christian financial advisor and CERTIFIED FINANCIAL PLANNER™. Abundant Advisors provides financial advice for Christians with convenient virtual meetings. Let’s talk if you are ready to make the next move.