The other day I asked the question, “Should you rent or buy a house?” Today I thought I’d go over the pros and cons of renting. There are plenty of good reasons to rent, and several reasons not to.
1. Pro – You aren’t tied down to an area. If you need to move for a job you don’t have to go through the hassle of selling your house. Alternately, if you just want a new place you also don’t have to worry about selling the house.
2. Con – You don’t own it. There is just something about having a place to call your own. You can paint and remodel and make changes to the yard and you don’t have to ask permission.
3. Pro – It is cheaper. In the long run it may not be cheaper, and we’ll get to that, but on a month to month cash-flow basis renting is cheaper. You don’t have to pay for the insurance, property taxes, PMI if applicable and anything else associated with owning the property.
4. Con – You have to deal with a landlord. They may or may not be pleasant to deal with.
5. Pro – You can get by with a smaller emergency fund. If the heat or AC goes out, it isn’t your responsibility to fix.
6. Con – No equity. When you are paying a mortgage, at least some of the payment goes towards owning the home. Rent is gone as soon as you pay it.
7. Pro – Can’t lose money on it. Many people consider houses to be an investment, which they can be, but in general they are a place to live. As an investment, houses can go down in value as many people have learned recently. While renting, you don’t have to worry about a house being underwater.
8. Con – Potential cost of damages. If you break something you may have pay for it at the end of the lease. There are no guarantees of how much it will cost.
{ 5 comments }
One of the pros i find from renting, is i really don’t have much responsibility. Sure, I have to change a lightbulb, and sweep once in a while… but if anything major happens, its not my problem!
Derek, good post and fair with each side of the issue.
If someone decided to rent at a rate below what owning would normally cost them per month on their budget, could they save the difference and call it an “equity” account? At the end of thirty years, would they be able to buy a house cash?
Keep up the good work,
Eric
Well it depends on a lot of things. First off, you probably aren’t going to be able to rent the same place for 30 years, so you have to consistently find something that is cheaper to rent. Certainly that is doable.
Then, the bigger problem, is that you have to keep up with inflation. When you are paying a mortgage inflation is working in your favor. The entire 30 years you have the same payment assuming a fixed mortgage. So by the end, you are paying with less valuable dollars, and in theory the house will be worth more than you paid. If you are renting during that time, your rent will go up over time, and the house you are buying at the end will be more expensive.
It can certainly be done, but I don’t think I’d recommend renting for 30 years. You should be able to save up enough that buying a house makes more sense sooner than that.
Good list. You did a good job of making a list of the arguments that keep floating around in my head, haha. I agree that over time inflation works in your favor when it comes to the mortgage. I like that you highlighted that a primary house is a poor investment. Because houses seem to simply keep up with inflation over long periods of time (Google: Case Shiller index), it’s a pretty crummy investment vehicle itself. Particularly due to the risk of losing your entire investment if you have a down period yourself financially. I fully intend on buying a house at some point, it’s just a matter of when, and how I will pay for it. The biggest reason for me is to simply have something I can call my own and make any changes to it I want.
Interesting. I still think owning a home is better. either way, you have to pay for housing. In 25 or so years, you won’t have to (if you don’t refinance your mortgage) and you’ll also be able to sell + get almost all (if not more) of you money back.
But that’s just me.
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