Conventional wisdom used to state that buying a home is always a great investment. But after the housing crisis, many people who saw their equity sliced in half began questioning this logic.
That’s unfortunate. In most parts of the U.S., home buying is still a better decision than renting for people who plan to remain in the space for at least 4-5 years or more, both for financial and emotional reasons. Let’s explore some of these factors in-depth.
Price Security in Home BuyingHistorically, prices tend to rise over time. For example, a loaf of bread, a gallon of milk, and a semester of college tuition cost more today than they did in 1990.
Your mortgage payment, however, is one constant you can rely upon. If you hold a fixed-rate mortgage, your monthly principle and interest (P&I) payment remains the same, regardless of how prices are moving in other industries. (Your property taxes and homeowners insurance may rise.)
Price consistency offers the advantage of planning for the long-term future. As a homeowner, you can anticipate your monthly housing costs in 5, 10 or 15 years.
As a renter, you can’t lock in this type of security. As prices climb, landlords raise the rent to meet the current market. In fact, some landlords write rent escalation clauses into their leases, systematically raising the rent annually.
If you’re renting with a month-to-month lease, your landlord may announce a price jump with only 30 to 60 days of advanced warning, depending on the laws in your area. This puts renters in the difficult position of needing to either find the additional funds or scramble to secure new housing with little advance warning.
Investment – Cash-on-Cash ReturnAs a homebuyer, the outlay of a small down payment can give you the opportunity to make outsized gains.
Hypothetically, for example, imagine that you put a 20 percent down payment on a $100,000 house. The price rises 5 percent, to $105,000. You would earn $5,000 on your initial outlay of $20,000 – a return of 25 percent. This is known as cash-on-cash return, and homeownership can make this type of gain accessible to the average person.
Forced SavingsA home can be a type of “forced savings.” Each month, a portion of your mortgage payment is returned to you in the form of equity. The longer you own your home, the more equity you build – both via mortgage payments as well as in potential value increases.
Renters don’t have this luxury. Many of the pro-rental arguments hinge on the assumption that money “saved” (either via lower monthly payments or through alternate uses of the down payment) would be invested in the stock market.
Realistically, though, what’s the likelihood that a renter would invest that money, rather than spend it on a trip to the Bahamas? And if that money were invested, what’s the likelihood that a renter wouldn’t panic during the next crash and sell at the bottom of the market, turning paper losses into actual losses?
A home functions as ‘forced savings,’ helping you build equity. Like a personal trainer, it keeps you accountable.
Flexibility with Home ImprovementsAs a homeowner, you can have the freedom to upgrade your home to your heart’s content – without carrying risk or ongoing financial commitment.
If you get a bonus at work, you can celebrate by installing hardwood floors or renovating the bathroom. If you suffer a financial setback, you can defer your plans to remodel the kitchen.
Renters don’t hold this flexibility. The only way they can upgrade their living space is by moving, and this entails both hassle and commitment.
Homeowners, by contrast, can upgrade their home piecemeal as they accumulate cash over the years. Home improvements are a one-time expense that doesn’t require continuous commitment.
Pride of Home OwnershipYou wouldn’t invest hundreds of hours cultivating an exquisite garden in a rental property. You wouldn’t hang wallpaper or replace the light fixtures on a rental property.
As a homeowner, you can take pride in crafting, personalizing and perfecting your home. The space can truly morph into a reflection of you, in a way that a rental property never could.
Neighborhood ConnectionAs a homeowner, you’re more likely to become involved in your local community. There’s a stronger chance that you’ll join the neighborhood association, organize potlucks or block parties with your neighbors, coach a local sports league or volunteer at the local school.
While it’s possible that you’ll get involved with the community as a renter, you’ll also likely feel an emotional barrier that stems from knowing you might move in a year or two. Committing to an area for the long-term can inspire you to invest more time and energy into improving the neighborhood and connecting with the surrounding community.
ALEXANDRA FILIACI | blog.coldwellbanker.com
