Should I Rent or Buy?

 

There is a saying, “Why rent when you can buy?” and various versions of this being thrown all around. This gives the impression that it is better to own rather than rent or that renting is somehow a negative thing. This is absolutely untrue and I am going to tell you why.

When you set out to be a “homeowner” you had better weigh the pros and cons. Never let emotions like guilt or fear be a factor in any decision-making, either. Owning isn’t necessarily better than renting. Here are a few good reasons to rent, a few good reasons to buy, and a few fairy tales that have been told to you over the years that may have swayed you until now. Be informed and make the best decision for you and your family.

A Few Good Reasons to Rent

There are a bunch of good reasons to rent, especially if you are a busy person who works a lot or are getting older and unable to keep up with the maintenance of owning a home. Here are a few of my favorite reasons to rent.

Pro Rent Reason #1 – The maintenance and upkeep of your home are someone else’s responsibility.

There is a list of things to do that comes with the job of homeownership and that list seems to never end. Maintenance of a property can be a nightmare, especially the older a property becomes. For this reason, I love renting.

If your refrigerator breaks, you call someone and they fix or replace it. If the heater or the air conditioner goes out, you aren’t harnessed to a whopping repair bill that can run into the thousands. That sudden and unexpected expense belongs to someone else and they have the responsibility under each state’s laws to repair it in a timely manner. The laws can be very strict on a landlord, but that’s good for you as a renter.

 

Plumbing, electrical, heating, cooling, major appliances, cabinetry, and fixtures are all part of your landlord’s responsibility and not yours. Sometimes they are even responsible for spraying for bugs, doing yard work and pool maintenance, and making certain you have a safe and secure place to live, collect your mail, and park your vehicles. I like that. It gives me less to worry about, especially in a vacation home.

Pro Rent Reason #2 – Sometimes, utilities are included in the rent.

What a bonus! Not only can garbage pickup, sewage, and water be included in your rent, but other utilities as well. I love this!

I have an apartment I rent when I’m in Florida that takes care of all my utilities for me. What may seem to be a high rent is actually saving me hundreds of dollars a month were I to buy and own a little piece of Orlando myself. They pay for heating, cooling, electricity, water, refuse, sewage, cable, phone, internet, landscaping and pool maintenance, 24-hour security, and pest control. All I pay is one monthly check to them and a small monthly check for my personal insurance. It’s awesome. Saves me time and money.

Obviously, not all rentals include all this, but the point is to find out what is included and figure out what it would cost you if you were to pay it on your own. There could be great savings there.

Pro Rent Reason #3 – Flexibility!

When you rent, you have the ability to move at will. You don’t have to hope that the market is good so you can sell at a price high enough for you to pay off your mortgage and your realtor. You just give notice and you move. It’s a perk for sure. If the crime rate goes up, you move. If you get a job offer in another state, you move. If you feel like living abroad for a year, you put your stuff in storage and you move. Flexibility, Baby! The kind homeowners do not have. They are stuck geographically forever. As a renter, you are not.

A Few Rules for Renters

It is perfectly fine for a renter to ask if the owner of their potential home has money set aside for unexpected repairs. Ask questions. Do you have a reserve account set up in case my heater goes out in the middle of winter? Do you have a fixed-rate mortgage on the property so I can count on a stable rent rather than one that fluctuates each year? How often in the past have you raised your rents on tenants? Don’t be afraid to ask questions like these and don’t be afraid to change anything in the rental agreement before you are willing to sign. I don’t want my landlord coming in without me there, so that’s always in my contract. They can’t enter my home without me present and without notice. It may be their property but it’s your home.

I always recommend renter’s insurance, even if you rent a furnished apartment. The rates are low and will protect all your personal belonging, so don’t forget and definitely don’t neglect. My daughter pays $24 a month and that is absolutely worth her peace of mind.

You also have rights as a tenant, so know your rights. Each state gives tenant’s rights as well as rules and restrictions for landlords on the state’s website. Go there and learn them.

Understand that a good landlord is a property owner who wants to maintain or improve the value of their property while keeping tenants happy, in place, and paying rent as long as they can. It behooves them to keep a tenant for years rather than having to go out and find a new one. That is a costly process. Be a good tenant but make certain you pick a good landlord.

A Few Good Reasons to Buy

It is said that owning a home gives you the feeling of pride, independence, and freedom. However, you should realize that how something makes you “feel” is absolutely up to you. For instance, you can feel trapped and weighed down by a mortgage just as easily as you can feel the pride of ownership. How you feel about something is always a choice made by you, not by an inanimate object like a home or mortgage.

Here are a few good reasons to own your own home not based on fiction.

Pro Ownership Reason #1 – Homeowners are eligible for write-offs and deductions on their taxes.

As a homeowner, you will most likely have a mortgage in which you pay interest. You can write off this interest on your federal income tax. Renters don’t have a mortgage, nor do they pay interest, so they have nothing to write off.

As a homeowner, you will be paying property taxes each year and you can deduct these on your taxes, as well. Again, renters don’t pay these types of taxes so they have nothing to write off.

Renters are not eligible for homeownership-related credits or deductions on their taxes because they don’t pay them in the first place, although they are usually a portion of the money paid in rent to the landlord. The landlord pays the interest on their loan and the taxes on the property, so the landlord gets the write-off.

Pro Ownership Reason #2 – Whatever improvements you make, you keep.

When you own your own home, you can make upgrades to the property by increasing the value of the home. Whatever value you create is yours to keep when the property sells. However, when you rent, a nicer and more improved property can often mean higher rent.

This leads to our next best reason to own.

Pro Ownership Reason #3 – You could earn six-figure tax-free money when you sell your home.

When you own and have lived in a home as your primary residence for at least two years and you sell it, the profit you make is tax-free up to a certain amount after two years of a primary residence. Losses on a personal home cannot be deducted, however.

Some people do this for a living: buying a home, fixing it up, and selling it after two years of primary residence. If you are the type of person who loves to do DIY projects, replace cabinetry, tile floors, or upgrade light fixtures, then owning a home like this is your best bet. You can buy a home that is in need of upgrades for a lower than market value price, fix it up, and then sell it for a tax-free profit. Rules apply, such as the home has to be your primary residence for two years or more, but the benefits are pretty cool. A married couple filing jointly could potentially make up to $500,000 tax-free money every two years repeating this process. Have your accountant lay out all the rules for you, but it’s a cool way to make tax-free money if you’re into fixing up homes.

The caveat here is that you cannot deduct losses on your personal residence. So, if the market takes a tumble before you can sell or you miscalculate the cost of the renovations, you are stuck with a loss you cannot write off.  A loss can only be written off by an investor.  A gain is only tax-free for a non-investor and homeowner.

What happens if your home’s value does fall below the principal you owe on the mortgage?  Hold on to the property until it goes back up.  If you have to move, rent it out making certain you cover the mortgage, taxes, and insurance payments with a reserve being held in case of repairs.

Pro Ownership Reason #4 – You can change whatever you want whenever you want.

When you own your home and you are bored of the same old colors on the walls, you can go to Home Depot, buy some paint, and change the wall colors. If you want to pull up the carpet and put down hardwood floors, you can. If you want to extend your bathroom into an old hall closet or rip out a wall to make room for your new TV, just make certain the wall you’re tearing down isn’t load-bearing and do it. It’s yours so you can do to it what you want, providing there are no laws or CCR’s to restrict you. The very thought of this type of freedom makes some people happy, even if they never change a thing. Just knowing you have that type of freedom is enough for some people.

Fairy Tales

Here are a few fairy tales you should never fall for.

Fairy Tale #1 – Your home is an asset.

If there is one thing that working with Robert Kiyosaki has taught me, it’s that your home IS NOT an asset. Assets put money into your pocket. Liabilities take money out. Your home is a liability, plain and simple. Do not treat your home like an asset. Do not use it like a bank and borrow money against it. Treat it like a liability and you are far less likely to get burned.

Fairy Tale #2 - Owning a home is better because you’re building up equity.

Um, this is not necessarily true. The real estate market is not as stable as it once was and certainly does not show the continuous growth that it once did. House sales and prices are now beginning to decline again, just like they did after the crash nearly a decade ago. There are many experts out there warning of another adjustment in the near future, so you cannot count on your home’s value to grow and build your equity...yet.  Maybe after the next adjustment.  Remember, when a market crashes, it usually does so quickly, so there won’t be time to sell your home before it does.

Also, remember this fact when you are buying or thinking about refinancing.  A mortgage loan is different than a credit card loan or many other types of loans. Mortgage loans are amortized. Other loans charge you a straight percentage each month. This means that when you pay your mortgage, the majority of interest charges are packed into the first years and tapered down as years go on. You will be paying much less towards the principal of your loan in the first five years as opposed to the last five years of your loan when you will be paying mostly principal. That is why it is not usually a good idea to refinance your mortgage if you are planning on moving in the next few years. You would be paying mostly fees and interest, barely touching the principal at all in that amount of time.

The majority of your mortgage payment goes towards interest on your mortgage loan in the beginning. Very little will go towards the principal in those first few years. Remember that. Ask your mortgage company for an amortization schedule for your loan and take a look.

Fairy Tale #3 – Owning a home gives you more stability.

Well, that depends on your definition of stability. It may mean you are stuck, which is one definition of stable but not a pleasant one.

I have lived in the Phoenix Valley since the late 80’s. I’ve seen a few big companies, like American Express and Motorola, do some major layoffs here. As you can imagine, when you own your home and you lose your job, it becomes a chore to sell in order to relocate. You are stuck geographically. When a lot of people in the same industry lose their jobs, the prices of homes in that area can drop as the market becomes flooded with inventory. Stable becomes stuck. So, yes, you aren’t at the mercy of a landlord, but you may be at the mercy of the market.

While owning a home does give you the stability of knowing your mortgage payments won’t go up (because I know you would never get an adjustable-rate mortgage… ever), there can be other challenges that creates.

Fairy Tale #4 – You can’t put personal touches on a rental and make it your own.

This only depends on who you rent from. In some areas, it is possible to rent a home for the price of an apartment. So, tenants have more choices now than ever before. Also, some landlords are busy. I have seen ads for tenants who are willing to do handy work in exchange for rent. There are varying degrees of this scenario, as well. That means if you are into decorating and handy work, you can rent from someone looking for that type of tenant.

I’ve given my tenants the flexibility to decorate as long as it adds value to the property and I have written final say on everything. If it does not, they are responsible for a deposit of what it would take to return it to its former value. For instance, if a tenant wants to tile my tired carpeted floors, I’m all for it. I tell them my budget and I have the written final pick on whatever is installed. But if they insist on a color or pattern I can’t stand, I will let them do it as long as they give me the money to rip it out and replace it once they are no longer tenants. Now, no one has ever put ugly tile in one of my units because we’ve always been able to agree on something we both like. However, the point is, I want my tenants to love their home because it is their home. I want them to stay as long as possible and that means keeping my good tenants happy.

Whatever your agreements are, get everything in writing. Every contract is negotiable and only what is written down will stand up in court.

Fairy Tale #5 – It’s cheaper to own than to rent.

Not always. It depends on where you live. Different markets have different prices. If there is confusion on which costs less, write it all out and compare. Make certain you add all the costs of ownership in, as well. Things like homeowner association fees, taxes, interest, insurance, and maintenance. Also, look at your travel expenses to and from work from a home and from a rental. These items are often missed in worksheets, so make sure you add them in.

The #1 Reason to Rent or Own – It makes you happy.

Now I know I said my reasons wouldn’t be based on fiction, but again, how you feel about something is real to you. If it makes you happy, then by all means, do it. Any of the following emotions can be felt when buying a home or renting one; freedom, accomplishment, fiscal responsibility, pride, stability, independence, control, and happiness. When you have weighed all your options and come to a decision, take pride in that decision because it is truly what is best for you at this time in your life. Be happy with the fact that you are in control of what you do at all times. That is what is most important.

 

 

 

Michelle R Russell

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