Dear Rick:
About a year ago, my wife and I sold our home. At the time, our game plan was to buy a home on the west side of the state to be closer to our daughter. Because of timing issues, we were planning to rent a condominium for about six to nine months. The deal for our new property eventually fell apart and thus, we have continued to rent for the last year. Surprisingly, my wife and I like our rental property and we are considering staying where we are and renting for the foreseeable future. I have always believed that buying a home was a great investment and that renting is just throwing money away. I would be interested in your thoughts in what we should consider in making our decision. You should know that my wife and I are in our mid-50s. I am still working, and I’ll probably work for another 10 years. My wife no longer works, other than taking care of the grandchildren.
Thank you.
Mark & Kim
Dear Mark & Kim:
I, for one, do not necessarily believe that houses are great investments, nor do I believe that when you are renting you’re throwing your money away. I hear that argument all the time, and when I do, it is typically from people who are focusing on their monthly mortgage payment versus their monthly rent. Unfortunately, this is not a fair comparison. The reason is that it ignores other significant costs associated with home ownership.
Often times I hear that someone bought a home in 2000 for $150,000 and sold it in 2020 for $300,000 and they think they made $150,000. Unfortunately when people solely focus on what they paid for the house versus what they sold it for, they are not considering the significant costs incurred to maintain their home, something that if they rented they would not have had to pay. Homeowners must bear the costs for repairs, maintenance, and updates. In addition, on a year-by-year basis, you’ll also have costs for things such as insurance, property taxes, snow removal and landscaping. In some rental properties, utilities and water may be part of the rent, but as a homeowner, those costs are your responsibility and those costs can be significant. In addition, whether you end up paying cash for the home or have a mortgage where you’ve had to make a down payment, you will have money invested in your home that could have been invested elsewhere, earning you additional money. Therefore, when you buy a home, you do have to factor in the lost opportunity costs. The bottom line: When you run the numbers and you look at it purely economically, renting in many situations is actually a better financial move.
Another factor to take into consideration is the change in our tax laws. Historically, many of the additional costs that a homeowner had were somewhat offset by the tax savings received from writing off mortgage interest and property taxes. However, for most people, because of the new tax laws which have significantly raised the standard deduction, they are no longer writing off their property taxes or mortgage interest. Unfortunately, the tax benefit of owning a home is not as relevant for most people as it used to be.
I don’t want you to think that I’m opposed to homeownership, because I’m not; and actually, I own my home. However, for me, the great benefit of owning a home is not financial, but rather, the benefit is in the quality of life. Obviously, there are benefits of both renting and buying. The real issue, finances aside, is what property is going to best match your lifestyle. In conclusion, I see no problem with renting, and the fact that you both are happy with the quality of life, you should stay there. You are not throwing your money away; in fact, you’re giving yourself greater flexibility. Whether you were going to pay cash or a down payment, you now have that money available to invest for your future needs.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email him at rick@bloomassetmanagement.com