There are advantages and disadvantages to both renting and buying the home you live in; the choice depends on your situation and your goals.
Financially, purchasing is a better long term decision then renting and in the right market conditions can even pay-off in the short-term. Today, rates are still at historical lows and appreciation is very strong. So, besides our current low rates and appreciation (with a lot of room left to grow), are there any general principles that make buying a better decision than renting?
When it comes to buying vs. renting the most common comparison is equity. With renting, you do not accumulate equity whereas homeowners can build equity, in multiple ways: Principle reduction, sweat equity and appreciation.
- Principle reduction: Your payment is comprised of 4 parts: Principle, Interest, Taxes and Insurance (PITI). The principle portion of your mortgage is reducing the loan balance with each payment, which can be recovered when you move away and sell your home. This reduction starts off small compared to interest, but with each payment the reduction grows thereby a larger portion of your monthly payment is building equity in your property. A rent payment has just one portion…rent.
- Sweat Equity: If you fell out of love with the unexplainably peach color of your home…you have the freedom to paint it any color you choose. Your reward: Home improvements increase the value of your property, which is also called sweat equity. According to HGTV when comparing different home improvements, a new front door has the highest return on investment at 102%. Most improvements like kitchen or bathroom remodels return about 60-80% of your investment. Really though, recouping 75 cents of your dollar while increasing your comfort and lifestyle sounds like a win/win and is another advantage of owning.
- Appreciation: According to the National Association of Realtors the prices of existing homes increased by 5.4% annually from 1968 to 2009 on average. In Seattle the current year-over-year growth is 13.2% according to the Case-Shiller Home Price Index. Obviously this last year has been a great year for home appreciation and most economists believe 2014 will see this return closer to normal growth at around 6%. A $200,000 home appreciating at just 5.4% is worth $338,404 in 10 years. Appreciation is a wonderful thing.
So, watching your equity grow because each month a portion of your payment is lowering your loan balance and your home is appreciating at 5.4% is the great advantage of equity. Take into account the increased value from the new front door and that new pickleball court you use every weekend and you’re quickly seeing the value of home ownership.
Owning real estate’s big win is in leverage. Using leverage to buy a home you can afford is one of the greatest financial advantages of owning real estate over any other asset (depending on your market) and especially renting. The stock market may return more on average in the long run, but you cannot live in your mutual fund. As real estate appreciates, your appreciation is not only on the amount you invested (down payment) but on the entire value of your home.
Example: If you put 5% down on a $300,000 home and it appreciates 5% in the first year your equity doubles from $15,000 to $30,000 in just one year.
Of course, the cost of selling real estate is much greater than the cost of selling stocks which is why no financial planner advises real estate as a short-term investment. Plus, the national average for home appreciation is about 5% while rent typically grows at 3% year-over-year in non rent-controlled markets. Both numbers favor the homeowners.
3. Having a home, not just a place of residence:
Owning a home is not just about the financial decision but also, if not more, about the lifestyle and freedom of owning the roof over your head. An apartment or rental can be a home too, but saving your money so you can build that dream deck or planting the perfect garden…that for many is the big winner in the rent vs. buy decision.
There are also some advantages to renting:
Short-term leases are options in renting but they are not with buying. If you expect to move within 2-3 years, renting for now might be a better option for you.
2. Less Responsibility:
There are responsibilities of homeownership such as maintaining a home and paying for repairs that renters do not have to pay for.
Honestly, paying your mortgage off and living without a rent or mortgage payment should be the ultimate goal of homeownership. Also, it is important that you use the right mortgage product for your individual goals and situation. If you’re thinking of buying, take a home buying class to learn more. If you need help saving, meeting with a Verity finance counselor to create a plan for you is a great decision. Like the famous quote from Seneca, “Luck is what happens when preparation meets opportunity.” – Just sayin’.
Hello, I’m Jeremy – I manage the business development efforts for Verity’s mortgage department. My passion is in helping Verity members down the path to financial freedom and home ownership. I try to go beyond the mortgage loan when helping members as I discuss real estate and financial education.
I have a degree in financial services and financial management from California State University. I currently live in Auburn, WA with my wife and baby on the way.