Why Renting Can Be Riskier than Owning
Renting versus buying is a big decision. But whether you rent or buy a home depends on your financial situation and personal goals.
The rent versus buy debate is nothing new, but it has been top-of-mind for most people recently because the housing market has been so wild in recent years. Renting may be the better option in certain circumstances, such as if you need the flexibility to move or prefer the low to no maintenance lifestyle. But many people realize that buying a home gives you ownership, privacy, financial benefits, and great pride. Not only that, but it is often less risky, too. Below, let’s look at how renting can be riskier than owning.
No investment potential
Why continue to throw away money on rent when you can buy a home? When you buy a home, your home’s value will likely appreciate—especially if you live in an area with a strong job market. However, while we have seen rapid and record-high home appreciations in recent years, you should never expect it to continue for years on end. Although actual home price appreciation varies by location, historically, home prices have gone up an average of 3.8% per year, according to the U.S. Department of Housing and Urban Development.
Additionally, owning a home is a “forced savings” mechanism, meaning you are paying down debt and accumulating equity with each payment as a homeowner. In contrast, rent payments only cover the consumption value of housing and do not accumulate savings.
More restrictions
Do you love wallpaper? Do you want to plant a garden? Or maybe you want to hang a new 60” TV on the wall? As a homeowner, you will have fewer restrictions regarding the choices within your home, provided you are not breaking local building codes or Homeowners Association (HOA) regulations. You will have much more creative freedom to build a patio, install a fence, paint your walls, update fixtures, or whatever you’d like when you own a home versus while you rent.
Less privacy
Many days does it seem like your apartment walls are made of nothing? Are you tired of hearing Shawn and Ashley arguing again? Well, when you own your own home and have your own four walls, you’ll no longer have to deal with flimsy walls and annoying neighbors. So enjoy your privacy and your quiet evenings.
Possible tax benefits
When renting, you don’t get any tax benefits.
Most people get some of the biggest tax breaks from owning a home, including deducting mortgage interest. For tax years before 2018, you could deduct interest on up to $1 million of debt used to buy, build or improve your home. Now the limit is reduced to $750,000 of debt for binding contracts or loans originated after December 16, 2017. However, you can also deduct the local property taxes you pay each year, too. As always, please consult with your accountant for professional advice on your situation.
Fluctuating payments
If you finance your home with a fixed-rate mortgage loan, you will know the exact amount of your principal and interest payments for the life of the loan, which could last as long as 30 years. This long-term predictability allows for financial stability.
However, if you rent, you’ll have a much more difficult time accurately predicting your monthly rent in the years ahead. When renting, fluctuations in the housing market could lead to significant rent increases. Or you could even be evicted if the landlord decides to renovate the apartment or sell. Either way, while renting, you are at the mercy of the landlord and the rental market each year. If you must move, the process is unpleasant and expensive.
“Should I rent, or should I buy” is one of the most heavily debated questions and it depends on many factors, including your lifestyle, financial resources, and investment goals. No matter your decision, making an informed decision is critical based on your unique situation. After all, making an uninformed decision is perhaps the most significant risk of all.
Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of the information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market. While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.
