Are you in the market for a house or a new lease? If you are debating whether to finally take the step into the land of homeownership or maybe thinking about upgrading to a newer apartment, let's make sure we weigh the pros and cons of each decision and take a realistic look at what we can actually afford.
Is renting throwing money away?
“Renting is just throwing your money away.”
Not true AT ALL. It’s easy to just think of it as rent payment vs mortgage payment - but it’s so much more complex than that. There are several differences that make renting and owning property distinctly different from one another.
With renting, you are putting a roof over your head without all the responsibilities associated with homeownership. You also have more flexibility when it comes to moving as you aren't necessarily tied down to your property.
With ownership, you are acquiring a large investment and have much more freedom to make changes. You also have big upfront costs as well as long-term costs that can add up, many of which may be a fun little “surprise” —lol, never actually fun.
Don’t let anyone shame you into buying before you’re ready - or buying at all. There is no “right” answer here. Let's review some of the key differences between renting and owning.
there is nothing wrong with renting
The biggest myth about renting is that you're throwing away money you could be putting towards a mortgage. This is so not true. While you aren't building equity with monthly rent payments, you're not throwing money away because you need a place to live and it's going to cost you money one way or another. Not to mention, not all the costs of homeownership go towards the equity of the property.
The Pros of Renting a Home
Flexibility and Freedom
Renting offers an unrivaled freedom. No 30-year commitment, no permanent ties to one place. If your dream job calls you to a different city or you want a change of scenery, renting allows you to pack up and go without the hassle of selling a house. You're the wanderer, the explorer, and the world's your oyster.
Say Goodbye to Maintenance Headaches
Leaky roof? Broken water heater? Those are your landlord's worries, not yours. In a rented home, the property owner shoulders the burden of maintenance and repairs. No surprise bills for you. This peace of mind can be a financial life saver.
Budget Friendliness
Renting often comes with lower upfront costs. Security deposits and monthly rent are typically more affordable than a hefty down payment, making it easier to manage your budget. Plus, no property taxes or homeowners' insurance to deal with, which frees up some extra cash. With renting, your housing costs are the same each month (with the exception of utilities fluctuating). This makes budgeting your housing expenses simple and easy.
The Cons of Renting a Home
No Equity Building
Here's the kicker: every dollar you pay in rent doesn't buy you a piece of the property. It's gone for good. You're building your landlord's equity, not your own.
Limited Customization
Most leases prohibit major changes. While most places allow you to change the colors of walls (for a small fee to change it back when you move out), anything bigger is probably a no-go. Want to knock down that wall or switch out the flooring? You might be out of luck.
Unpredictable Rent Increases
Rent can rise like a balloon on a windy day. While owning a home can offer some stability, renting is subject to market fluctuations. Landlords can increase rent at the end of your lease, and the amount might leave you scrambling to adjust your budget.
Benefits of owning a home vs renting
Homeownership can be really awesome, but also really challenging. Like, you OWN (well, the bank technically owns it but we won't get into technicalities) your own home! You have the freedom to make any changes to the look and design of the space. Plus, you have a little bit more stability and pride of ownership.
The Perks of Owning a Home
Building Equity
Homeownership is like a long-term investment in your future. Every mortgage payment chips away at the principal, building equity in your property. Over time, this can become a sizeable nest egg, which can be tapped into when you're ready to retire or make significant life changes.
Stability and Predictability
With a fixed-rate mortgage, you can lock in a consistent monthly payment. No more fretting about unpredictable rent hikes. This predictability makes budgeting a breeze. Your home becomes a financial anchor, giving you a sense of stability.
Freedom to Customize
Owning a home means you can make it entirely your own. Paint the walls a funky pattern, switch out the fixtures, and create your dream space. The possibilities are endless, limited only by your imagination and well, money.
Tax Breaks
One of the perks of homeownership is the potential for tax benefits. Mortgage interest and property taxes are tax-deductible, meaning your taxable income is reduced and in turn, you pay less in taxes.
The Cons of Owning a Home
Financial Responsibility
Some people think that renting is more expensive than owning. While mortgages can be lower than the cost of rent, the overall cost of homeownership tends to be higher due to expenses you don't normally pay as a renter.
Here is just a glimpse of some costs associated with ownership:
Property taxes
HOA fees
Homeowners Insurance
Flood, earthquake, and/or other natural disasters insurance
Trash, water and sewer service
Landscaping services
And don't forget about repairs and maintenance, which can be very expensive and very sudden. Busted pipes, broken toilet, leaking roof…all of which cost a pretty penny to repair or replace (we're talking thousands of dollars). Because of this, you’ll want to ensure you have a pretty decently-sized sinking fund dedicated to housing so that if something happens, you don’t go into debt trying to fix a necessity.
Long-Term Commitment
Be aware that real estate is not a liquid asset. You can't just pick up and move whenever if you change your mind. With the unpredictability of the housing market, you may not be able to sell when you want. If you are able to though, you may not be able to sell it at the price you want.
Upfront Costs Can Be Daunting
The down payment is the elephant in the room. Saving up that substantial sum is a significant hurdle, especially for first-time homebuyers. It can take years to accumulate enough for a substantial down payment.
TL;DR
Owning a home isn’t always better than renting, and renting is not always as simple as it seems.
The decision isn't one-size-fits-all and depends on your financial goals, lifestyle, and preferences. The bottom line is that both renting and owning have their perks and downsides.
When it comes down to it, the decision should align with your long-term financial strategy. If real estate and stability are at the top of your list, homeownership might be your go-to. If you value flexibility and avoiding the burdens of property maintenance, renting might be your jam.
How Much should I Spend on Rent or Mortgage each month?
Now that we’ve established renting is A-OK, how the eff do I know how much to spend on rent or a mortgage each month?
30% RULE OF THUMB
You don’t want to spend more than 30% of your take-home pay (that’s post taxes).
I personally don’t like to spend more than 20%. I know this can be difficult depending on your salary and where you live. Just keep in mind if you’re above 30%, you will likely have a much tighter budget and something else will have to give.
EXAMPLE
If you receive a paycheck for $2,000 on the 15th and $2,000 on the 31st, your total take-home pay would be $4,000 POST taxes* (because your employer has already taken taxes out).
$4,000 x 0.3 = $1,200
Try to keep rent under $1,200.
OR if you are like me and aim to keep rent at 20% of your take-home pay, you'd keep it under $800 ($4,000 x 0.2 = $800).
Getting this ONE cost under control can help catapult your finances to the next level. Buying or renting “too much house” is something many people tend to do, so if you’re moving soon, try to stay within your budget!
*For my self-employed peeps: whatever you’re paid, you may want to knock 30% off that total for Uncle Sam - that’s your take-home pay to work from after future taxes.
WRAPPING UP
HOMEOWNERS
Expect the unexpected! State Farm recommends having a home maintenance budget of 1% to 4% of your home's value. So if your home is worth $400,000, you will want to set aside $4,000-$16,000 for annual maintenance costs.
RENTERS
If you are planning to move when your lease is up, don't forget to account for the following:
Security deposit which could be as much as your first+ last month's rent
Movers (plus tips for movers)
Packing supplies
Potentially new furniture and home goods
The main point to all of this is to not let society push you into buying a home sooner than you can comfortably afford to do so or shaming you because you’re “still renting” at whatever age you are. Both sides have costs that can sneak up on you! If you need help budgeting out your living expenses, grab my free budget tracker! It’ll help you sort what’s coming in and what’s going out each month so you know just how much room you have in your budget for rent (or mortgage).
