What is the American dream? Ask almost anyone and they’ll talk about opportunity: the promise that hard work and perseverance will lead to success. An important indicator of success has always been home ownership – the rambling Colonial, the cool green lawn, the white picket fence – all redolent of security and stability. Renting has traditionally been portrayed as a temporary solution, undesirable and financially unwise for the long term. But in many cases, the benefits of renting a home can make far more financial sense than buying one.
Any way you slice it, housing is the biggest line item in most family budgets. Common wisdom argues against renting: tenants are spending their money and getting nothing in return. Renting may be convenient – there are no demanding hurdles to leap to secure a mortgage – but in the end, homeowners are building up equity in a property they will one day own. It’s long been a tough argument to counter.
This wisdom is challenged by a report from ATTOM, a leading U.S. real estate data provider, in its 2023 Rental Affordability Report. They noted that in 95% of the U.S. counties analyzed, renting a three-bedroom home “is more affordable than owning a comparably sized median-priced home.” This holds true despite rents have risen faster than home prices over the past year in more than half the country.
Crunching the Numbers: Renting vs. Owning
Let’s talk about some of the most obvious financial differences between renting and buying. When buying a home, mortgage lenders often require a down payment as high as 20% of the property’s purchase price. That’s a significant amount of money you’ll need to save before even applying for a mortgage.
Closing costs are typically 2-5% of the purchase price, though these are generally added to the mortgage’s principal. Depending on the size of the down payment, your credit profile, income and other factors, you might be required to buy private mortgage insurance. All this, just to step over the threshold of your new home.
Let’s look at the other expenses involved in home ownership. Property taxes levied by states and local governments are a distasteful reality and can add up to thousands of dollars per year. Property taxes pay for schools, roads, public transport, police, fire departments, and all the services cities must offer to residents. If you want to live in an affluent area with a top-rated public school system, your tax bill could rival your mortgage.
In addition to taxes, there are other expenses that come with home ownership. You’ll need an insurance policy to cover major damage to your home, along with liability coverage in case the cable guy trips over your toddler’s Big Wheel and decides to sue you. And then there’s maintenance – not just regular chores like lawn care, but the inevitable minor disasters, like a leaky roof or flooding basement – that cost thousands. One homeowner recently saw a black bear burst through their border fence to take a dip in the pool – and there went $2,000,
The Financial Risks of Home Ownership
Let’s say you take the plunge and buy your dream home. With every mortgage payment you’re building up equity. That’s great, but your house isn’t a liquid asset – you live there, and it isn’t so easy to vacate. Meanwhile, the equity you’re building, particularly in the early years of a mortgage, may not be available should you suddenly need cash.
Most people assume their property value will rise over time. One hopes, but this is no certainty. Real estate bubbles burst; mortgages end up under water. Most financial advisors recommend holding three-to-six months of living expenses in an emergency fund, but the wise homeowner will double this figure. A renter who gets evicted might have a blot on their credit score, A foreclosure on a home, though, will have a long-term negative impact on your credit rating, and will evaporate all your accrued equity.
The Costs and Benefits of Renting
Home buyers always pay a sizeable down payment. According to the National Association of Realtors, the median down payment for first-time buyers in 2021 was 6% of the purchase price. However, 10% is required for many types of home loans, and lenders commonly suggest committing 20% to any first-time home purchase, to help limit the mortgage payment. Whatever the sum, it’s a hefty bag of cash for a young individual or couple buying their first home.
Meanwhile, renters pay a security deposit and the first month’s rent (and sometimes the last) to move in. The outlay is always much less than a down payment. Maintenance costs and repairs are the landlord’s responsibility, as are the property taxes. The only major expense a renter incurs is the monthly rent, and that is predictable. Utilities become clear after a few months of residence and can usually be harnessed into an affordable range. Insurance costs are also much lower since you’ll only need renter’s insurance to cover personal property. Finally, you aren’t exposed to the risk of falling real estate prices.
But let’s return to the naysayers, who insist that renters are throwing their money away. There are serious benefits of renting; if your cash outlay as a renter is significantly below the cost of home ownership, you can deploy your excess cash elsewhere, into investments that have the potential to outperform real estate. And if you are really bullish on real estate, you can always invest in REITs. By doing so, you can bet on the asset class while holding a liquid asset.
The decision to own or rent is based on more than financial considerations. For some people, home ownership has a deep emotional resonance. Those who value stability usually believe in the investment value of real estate and have no objection to spending time and money at the local home improvement store. These sorts of folks are well suited to home ownership.
Meanwhile, some people value flexibility and don’t want to be tied down. They are likely to be drawn to the benefits of renting, and the prospect of deploying saved cash into more profitable investments. If pulling up weeds and unclogging sinks isn’t for you, the renter’s life may fit the bill. As with so much in life, it comes down to priorities and personal preferences.
Residential Sale Leasebacks: Have Your Cake and Eat It, Too
For many people, their home is their most valuable asset, and there are times when they might want to unlock their home equity for an infusion of cash. While an outright sale, home equity loan or reverse mortgage are possibilities, there is another attractive option: a residential sale-leaseback.
By using a residential sale-leaseback mechanism, homeowners can quickly sell their house and access equity without enduring the challenges of a traditional sale. Once their home is sold, they lease it back from the buyer for a contracted period, typically long term. The new owner is responsible for property taxes, maintenance, and insurance. The seller uses the proceeds to pay off their mortgage and retains the cash equity. They pay rent going forward and continue to live in their home without interruption.
Home ownership offers many perks, but it also entails risks, expenses and opportunity costs. For current homeowners, particularly those who are feeling the pinch – or who simply desire an easier lifestyle, with more freedom and flexibility and the cash to invest in high-return assets that build wealth – the benefits of renting make it a highly attractive option.