Last week a recent comment by LAMoneyGuy on Dumb Little Man made me think about this topic. Then today, a message on Positive Sharing made me more curious.
Since I am a landlord, I want people to rent. I just don't believe it makes sense financially over the long term. I have always said that buying a property was the way to go. However, I agree now that there are times when renting may be appropriate.
To help get people to a conclusion on what does in fact make sense in their world, I am posting the pros and cons of buying a home. Everyone's situation is a little different, so simply cross of the items that don't pertain to you.
If you have any additional pros/cons feel free to add them to the comments or email us. If it belongs on the list, we'll add it. I anticipate doing the same because it's a certainty that I will think of something in the middle of the night.
The Pros and Cons of Buying.
BUYING
CONS:
- Down payment: Do you have the cash to put down? Although it's possible to obtain financing with no down payment, it's not entirely smart. At a minimum you should scrape together 10%. You should expect to pay PMI if your down payment is less that 20%.
- Budget Misconception: We bought our house after estimating all of the bills and deciding what we could afford. I must have done 3-4 huge spreadsheets but I was way off. Expenses consistently pop-up that you would never expect.
- Space: Typically buyers will purchase something larger because it all just feels to permanent. More space means more:
- Furniture expense
- Cleaning
- Utility Expense
- Property Tax:
You have no control over these. A municipal referendum could pass subsequently increasing your tax rate to a level you didn't expect. My rate was 2.25% when I moved in. Today it's at 2.65%.
- Association Dues: Buyers are responsible for these whereas renters are not. I have to pay $400 per year in dues to my association for maintenance to the landscape and entryways to the subdivision.
- Outdoor Upkeep: Shoveling Snow and Mowing the lawn seriously are a constant pain. If you have no time for this, add $30/week to your budget for a lawn service.
- Landscaping: I guess you don't have to install any but most people do and it's expensive. Oh, and don't forget pulling weeds. That's always a joy.
- Insurance: Homeowner's insurance is significantly more expensive than Renter's Insurance. I pay close to $1500 per year for home owner's insurance.
- Appliances: Renters don't have to worry about these items generally, but homeowners will need to fork up decent coin for new appliances. You could save a ton by buying used items but regardless, you will always have a risk element because of repairs.
- Depreciation: I have never feared this but the fact does remain. What happens if your town becomes riddled with gangs and drugs? What is the school's budget collapses and they get rid of all after school programs? These things will hurt your home's value.
- Moving On: If you get transferred at work or have an opportunity somewhere else, a house will tie you down. I just experienced this and had to pass on a much higher paying job.
- Wear and Tear: Hot Water heaters, exterior/interior paint, the roof, windows, etc. These are all things that have a limited life span. You, the owner are responsible to replace them.
- Mortgage: You want stress? Dealing with a mortgage is simple if you get a 30-year fixed loan at a low rate. If you roll the dice and get an adjustable rate, how will you deal with rate increases (similar to what is happening today)?
BUYING
PROS:
- Esteem:
- Most people take pride in saying “I own a house”.
- Taxes:
You can write off your mortgage interest and property taxes.
- Equity: If your property appreciates, you are building equity which simply means you are earning money. You can tap into that equity later in life for weddings, kids' college, emergencies, etc. If you do that, you can most likely deduct the interest on that too.
- Renovating: It's your house so you can do whatever you want without consulting anyone (such as a landlord).
- Payments: This depends on your mortgage, but you have the option to set-in-stone the amount of money your mortgage will be for the next 30 years. That's a very secure feeling. Renters will generally get hit with rate increases every 2-years at a minimum. In my case, I do raise rents every year.
- Pets: You can have all the pets that your municipality allows.
- Privacy: While you have to share your information with the bank to get the loan, you don't have to give your personal information to a landlord that has very little governing body watching what he does with the info.
- TV: You can choose your own cable/satellite TV provider.
- Neighbors: You can control how much you interact with neighbors. Renting in an apartment guarantees that someone is always a wall's width away.
- Can I come in?: No one can simply walk into your house. Landlord's often walk right in because, well, they own the place.
- Family: You don't need permission from anyone in order for Aunt Betty to move in.
- Finish Line: You actually have a light at the end of the tunnel. Once you pay off your mortgage you are living free! (although taxes continue)
Next week I will do this again with the renting scenario. I have 2 tenants lined up to talk to this weekend so we'll learn first hand what they say. It should be interesting, one used to own a house and got rid of it for simplicity and one is on public assistance who rents out of need.
– Jay