So you’ve binged a few seasons of Selling Sunset and Property Brothers and now you think you need to own a home to be financially independent. Real estate can be a great way to build wealth and I am definitely working towards eventually owning property eventually, but based on your situation, renting might actually be more cost effective.
Building a real estate portfolio can be a good tool, but you can still pursue financial independence without it. While becoming a homeowner may be your dream, in reality, it could just make more sense for your personal situation to just rent.
Here are major reasons why you might want to consider renting instead of (or before) buying real estate:
Lower Monthly Expenses
Owning a house can be very expensive, not only do you have to deal with pricey upfront costs like your down payment, but you will also have to cover maintenance, fees, taxes, and insurance.
As a homeowner, you are responsible for covering the costs of any repairs for damages that your property incurs. As a tenant, repairs and maintenance are never your concern, so you don’t have to worry about getting a crack in the ceiling fixed.
Let’s say your washing machine breaks down and you are #blessed to have a washer and dryer in your own apartment. If you are renting, your landlord will usually cover the cost for you but if you are the owner you are responsible for every little thing. Lower monthly expenses will give you more to invest each month.
Taxes and Home-owner’s association fees
Property taxes can be a major drain on your income if you’re a homeowner, but as a tenant, it’s not something for you to even think about. Likewise, you also don’t have to pay any homeowner’s association fees either.
Property taxes are set by your local town or city and are based on the current valuation of your property and land.
If you purchase a condo or a townhouse you will likely have a HOA (or Home Owner’s Association). It is usually a mandatory monthly fee for any communal use like maintaining the community gym, pool, parking lots, etc. Depending on the property type and location, these can run from a few hundred dollars per month to over a thousand dollars per month.
Changing property values don’t affect you
The value of housing goes up and down constantly depending on the conditions of the market, and as a homeowner, you will always have to worry about the market value of your property.
As a tenant, on the other hand, it makes no difference to you at all whether the house that you’re staying in increases in value by $10,000 or decreases by $20,000. This saves you from having to deal with the uncertainty of an asset as massive as a house.
When your property value increases, it will increase your property tax amount. Some items that can cause your property value to increase are renovations, local budgeting, or changes in your neighborhood.
It Offers you Greater Flexibility
One of the big disadvantages of being a homeowner is that you’re stuck in a specific location. You can’t just pick up and leave for that new job across the country.
However, when you are renting, you can do exactly that. You can pack your bags and choose to move into a new place whenever you want (as long as you don’t break your lease of course). Personally, since I am young I like that I am not stuck into staying in one location forever.
Lower Upfront Costs
When buying a home there are a number of upfront costs you will have to cover namely:
- Home Inspection – Before you purchase a home, you will need to hire a home inspector to review the property and find any structural issues with the home. These can range from $200-$600
- Down Payment – When you think of the upfront cost of purchasing real estate, the biggest is the down payment. On average using 20% is put down unless you qualify for a special type of loan (ie: FHA allows you to only put down 3.5%)
- Appraisal – if you are getting a mortgage, the lender usually wants to ensure the house is worth the loan they are giving you. These range up to $500 depending on your state.
- Escrow Account – When you purchase a home, you’ll need an escrow agent. Escrow is a third party that basically just ensure all areas of the contract are being met. They collect “earnest money” which is usually around 1% or so of the total purchase price until the property is taken off the market. After the sale is final, your mortgage broker may open an escrow account for your taxes and insurance. Since these are annual fees, your lender ensures you will pay by taking a portion of your monthly payment and leaving in this account until it’s due.
An average down payment tends to be around 20% of the purchase price, so even on a $400,000 property you would need to have saved up at least $80,000. Even if your landlord at a rental would charge you first, last, and security it wouldn’t be nearly that pricey.
Personally, I rent because I would rather have more cash each month to put into the market to invest and nothing beats not having to maintain amenities on my own. Home ownership might not be for everyone (and that’s completely fine). If you are deciding if renting or owning is best for you, think about how long you plan on staying there and what kind of upfront expenses you are comfortable with.