Reviewing the Benefits: Renting and Buying

Financial Planning, Yeske Buie MillennialPosted on February 8th, 20172 Comments

Written By: Lauren Stansell, CFP®

We have frequent discussions with Clients asking whether they should rent or buy – they may be asking for themselves, for their aging parents or for their children or grandchildren. As with almost every strategic planning opportunity we discuss with Clients, there are many factors to be considered. The monthly costs of a mortgage payment that adds to your equity versus a rent payment are what often come to mind first, and most times we hear that a mortgage payment will be less than a monthly rent payment so buying must be the answer. But there’s more to consider for the potential homebuyer – where do you see yourself in five years? Are you planning to relocate or look for a new job? Start a family? Have family members come to live with you? Are you looking to downsize? How do you feel about home maintenance? What does your emergency fund look like? The questions and tradeoffs are plentiful – and that’s why we’re here: to help you think about the many different tradeoffs and ‘walk it around the block’, something we pride ourselves in doing.

In thinking through the choice to rent or buy, here are a few of the many pieces to keep in mind:

Near- and Long-Term Plans and Goals
  • One of the most important roles of our job as financial planners is to help our Clients recognize their unique goals and create policies to help them use their resources in ways that support these goals. Accordingly, it is imperative to consider the benefits of renting and buying in conjunction with your overall goals to ensure you make the best decision for you.
  • As you think about your near- and long-term plans and goals, ask yourself questions like the following: where do you see yourself in the next one to seven years (or more)? Do you know you want to stay in the same location long-term? Or do you think you might consider moving or getting a new job? Do you want the flexibility of having that option? Do you not yet know what your plans may be?
    • It’s hard to say for sure what may transpire in the future, but in cases where general desires and plans aren’t yet known, it likely makes sense to rent to provide you with flexibility until you figure out your plans.
    • If you know that you would like to stay in the same place long-term and the idea of home ownership is appealing, however, buying may be your favored option.
Flexibility
  • To expand upon the notion of flexibility, the ability to have fluid living arrangements is one of the advantages to renting that often goes unacknowledged or unappreciated. As a renter, you can pretty much pick up and move whenever you want or need to. There are, of course, some expenses to getting out of a lease early, but these expenses are often lower than the time, money and energy required to sell a home.
Upfront Costs
  • Just as there are associated costs with getting out of a lease or selling a home, the costs of securing a home should also be considered when making your decision. A down payment on a home (in addition to realtor fees and closing costs) is no small expense compared to a security deposit for an apartment.
  • Furthermore, with expensive housing and rental prices in many areas of the country, it can be difficult for someone to rent and save for a down payment at the same time – or at least it takes longer to save enough.
    • This is likely one reason that we’re seeing a shift away from buying in the millennial generation. According to the Zillow January 2016 Housing Confidence Index (quoted here in USA Today), between 56.9% and 65.3% of people surveyed associate owning a home with the American Dream (the highest percentage belonging to the millennials interviewed), but only 9.2% of millennials surveyed expected to buy a home within a year.
  • Nevertheless, if owning a home is a personal goal of yours, the down payment is certainly something that can be saved up for or planned for, or perhaps funded from the proceeds of selling your prior home – it doesn’t have to derail your financial plan!
Monthly Budget & Maintenance
  • In addition to the initial down payment or security deposit, there are, of course, other monthly costs and payments to consider. Rent payments and mortgage payments are known and stable costs in general, so in both cases you can plan your budget around these known costs.
  • The difference comes about when we think about potential maintenance and repair costs. When renting an apartment, the landlord takes care of (both physically and monetarily) most maintenance expenses, from replacing a broken appliance to painting the exterior of the building. When you’re the homeowner, you’re the landlord. You must either find contractors to complete projects or complete them on your own time. Neither option is “right” or “wrong”, but it’s important to ask yourself – do you enjoy being handy and taking on home design projects or would you prefer that someone else be responsible?
  • Another monthly cost to consider is insurance – renter’s insurance is generally much cheaper than homeowner’s insurance. Of course, this shouldn’t be the determining factor in your decision, it is simply something to be considered and planned for.
Equity and Ownership
  • One of the most common arguments in favor of buying over renting is that all of these costs are an investment into your home equity rather than payments to a rental agency. For some, the other benefits of renting outweigh this disadvantage but for others, building equity by owning a home is a personal goal to take great pride in! Additional well-known benefits of home ownership include the ability to fully customize the space to your liking and to enjoy any price appreciation in the home if or when you sell it.
Tax Deductions
  • Finally, one of the big points we hear from Clients in this conversation is related to the tax deduction for mortgage interest. Based on your tax situation, the deduction could certainly be a great advantage. But, we don’t believe it should be the biggest or sole factor in the decision. As we like to say – we don’t want the tax tail to wag the investment dog (or decision dog).

In summary, there are many things to discuss and consider when you’re wondering whether to rent or buy. And all of these discussions depend on you, your situation, and your desires, goals and Live Big® dreams. Financial planning is all about tradeoffs, and we love discussing them with you! So, if you would like to ‘walk it around the block’ on this topic or any other, we would be happy to schedule time to talk.

2 Responses to “Reviewing the Benefits: Renting and Buying”

  1. Jim McCabe says:

    Lauren:

    Great article!

    A couple more points:
    – health: does my health dictate that I should rent and the maintenance would be done by the landlord?
    – travel: If I am retired and like to travel . . . does that influence the decision of rent or buy especially if I rent and all of the outside maintenance yard, plants, etc. is done by somebody else.

    Jim

    • Lauren Grove says:

      Jim,

      Thank you for your follow-up questions – both are important
      situations to consider when choosing between renting and buying!

      Health – Your health is certainly something that should be a
      consideration in this choice; if your health is good, it may not be a
      heavily-weighted factor. If your health is poor or worsening, however,
      homeowner responsibilities like maintenance, repairs and yard work
      likely aren’t possible or desired. The convenience of having a landlord
      take care of these necessities is a ‘plus’ in favor of renting. But it
      doesn’t rule out the possibility of buying. Perhaps you have a great
      handyman who can help you out with maintenance and repairs and a lawn
      service you trust to take care of your property – and those costs fit
      within your budget or Safe-Spending target.

      Another health factor to consider is whether there will be a move to
      retirement community, family member’s home or care facility. If this
      type of move is expected or desired in the near future, renting in the
      interim could be advantageous. Renting will provide a much easier
      transition, at least logistically, when moving to the new community or facility.

      Travel – Renting a place with a landlord is certainly easier for a
      frequent traveler. Single family homes simply can’t be left alone for
      months on end without someone around to ensure the home is in good
      condition. Things could unknowingly go wrong. For example, a pipe could
      burst and, if no one was responsible for checking the interior of the
      home frequently, no one would know until you returned home to a house
      potentially full of ruined belongings. That being said, there are ways
      to mitigate these risks if needed – by having someone check on the home
      frequently, hiring a lawn service, having your mail collected
      elsewhere, and so on.

      These are just two of many additional situations that could be big
      factors in the decision to rent or buy!

      Lauren

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