Many people lock themselves into a mile-high mortgage that they can’t afford. Unfortunately, this creates a hellish existence for the next 30 or so years. If you’re on the white picket fence about this, here’s how to know whether you’re better off buying or renting and saving the difference.
Are You Ready To Plant Roots?
Homeownership is for those that want to plant roots. If you like being tied down to a particular geographical area, then there is probably no substitute for a home you can call your own. Fortunately, there are plenty of homes on the market for sale. You can see more at Abbotts Countrywide or visit your local agent in person.
If you’re not ready to plant roots, or if you expect to move around several times during your life, homeownership can be very costly. Each time you buy and sell, you generate agent commissions, closing costs for a new home purchase, and restart the clock on interest payments (if you’re buying a new home after the sale of an old one).
The Wasted Money Myth
Many real estate investors, agents, and even financial professionals have promoted the myth that renting is a waste of money and at the end of 30 years, all you have are rental receipts. While it’s true that you aren’t building equity with monthly rental payments, you also aren’t building up equity with a lot of the money you’ll dump into owning a home.
The costs, over time, may swamp any returns from appreciation. For example, when you own a home, you’re not building equity by spending your money on:
- property taxes
- waste removal
- water and sewer
- regular repairs, like a new furnace, painting the home, fixing windows and doors, repairing the roof, etc.
- pest control
- trimming the trees and shrubs
- paying for homeowner’s insurance
- cleaning the pool
- paying for flood insurance
- paying for earthquake insurance
- paying interest on the mortgage loan
- paying closing costs and agent commissions
Even when you renovate your home, those renovations rarely, if ever, return 100 percent of the cost. On average, you get back 62 cents for every dollar you spend on a home improvement project.
Does Real Estate Always Appreciate?
As we’ve seen from the financial crisis of 2008, real estate doesn’t always appreciate in value. sometimes, you end up losing money. So, on top of dumping a lot of money into a property, you could see that property decline in value.
How Much Do You Value Your Time?
When you own a home, you have to make a commitment to fixing it and maintaining it. Do you like kicking back and relaxing on the weekends? This is probably not going to happen too often when you own a home. There are always projects around the house for you to work on – from patching the roof to fixing plumbing, or repainting.
All-In Costs For Buying
Ashworth Partners, a popular commercial real estate blog, analyzed data from the popular real estate site Zillow concerning a “buy vs rent” analysis. In the study, Ashworth Partners showed that long-term costs for repairs and maintenance, insurance, interest on the mortgage loan, and other ownership costs often outstrip the long-term return of many properties.
None of this is to say that owning a home is a bad idea, only that it’s often a bad investment. If you want to buy a home, do it because you want to own property for other reasons, not because you expect to make money off the deal.
How Much Will You Honestly Save By Renting?
At least one study claims to show that renting is a better deal than buying a home over the long-run. But, it wasn’t because renters actually had more savings. In fact, most renters have a lower net worth than renters.
What the study found was that it’s easier to save money by renting – save money over the cost of renting. But, many renters don’t actually put the money they save on maintenance and other ownership costs into a savings account. They spend it.
Homeowner’s on the other hand, are forced to “save money” by making that mortgage payment every month.
In that sense, it keeps homeowners “honest” about their savings. Each month, their asset becomes worth more and more. And, by the end of 30 years, they’ve accumulated a substantial net worth at a time when most people decide it’s time to downsize (because the kids have moved out of the home, and their residence is now too big to take care of).
The author concludes by saying that you shouldn’t expect to get rich by buying a home. But, you can expect to save money. So, even if you don’t end up making much of a gain, or any gain at all, it might still be a good idea if you’re not the type of person who is naturally inclined to save money on your own.
Molly Howarth works in property and handles lettings and properties for sale. She likes to share her insights on the property market with an online audience and is a regular writer for a number of real estate and property websites.