Owning vs Renting Demystified
There is an ongoing debate about whether renting an apartment/house is better than buying one. Valid arguments exist on both sides of the coin, and as with any choice in life, the only right decision is the one that makes the most sense for an individual’s personal situation. Even that can change over time as our lives evolve and needs change. The one thing remaining constant in deciding which option is best is the need to weigh the pros and cons of each option at a given point in time. What made sense last year might not work this year, and the changes you make this year may not work five years from now.
Constantly hearing clients talking about why they have decided to choose one option over the other has helped me narrow down the top considerations anyone in the housing market should consider. Here are the top seven considerations, in no particular order, to take into account when making a decision:
Credit
This one comes up often, and it is understandable why. There is so much hype surrounding the mortgage process that makes it seem like you need to give your firstborn child to the bank to qualify for a loan. After all, they are lending you a significant amount of money with nothing more than a promise you will repay it and the prospect of a long and expensive legal process to take the home back if you don’t. But the honest truth is that obtaining a mortgage is not only simpler than you might think, but it can also be easier than getting approved for an apartment lease.
How can that be possible? Well, the criteria for mortgage approval are established by federal regulatory agencies to promote home ownership. At the time of writing this, a credit score in the low 600s can land you an approval (albeit with a slightly higher interest rate than a more qualified applicant). The typical landlord is looking for scores of 700+ – often upwards of 750. There are no standard rental criteria, which allows landlords to ask for whatever they see fit. And when you think about giving someone the opportunity to live in an asset you worked your butt off to buy and must maintain every month, no one should fault them for only wanting the most creditworthy tenants.
Length of Stay
Real estate is not a liquid asset; you cannot get rid of it quickly. There are also significant fees that come with purchasing a home in the form of closing costs, taxes, and your down payment. Situations can always arise where you may need to sell a home quicker than you were expecting, but to go into the purchase knowing you will only be there for two years or less is not likely to end well. In such a short time period, the value of the home could have declined (over the long term real estate always appreciates), or buyers might not see the same value you did. These are generally the situations where you will see the term “motivated seller” in the listing, which is the polite way of saying the owner needs to sell in a hurry.
One should not despair if they made this mistake or if plans changed and they are now facing the prospect of a “fire sale.” If you can survive without getting any of your down payment back right away, and you have the stomach for being a landlord, you can always rent the house out. It won’t make you rich, and honestly, you might only break even, but either option is better than selling quickly and losing money.
Personal Circumstances
Restrictions, restrictions, and more restrictions. That is one of the most significant downsides to renting. You do not own it and must live by someone else’s rules – sort of like being a teenager all over again. No, that is not an exaggeration. I hear it from people all the time when their rental application gets declined for a reason they do not agree with, the most common being because they have a pet. Even when an owner is an animal lover, possibly even has one or several themselves, the majority of landlords do not want pets because of the potential damage to the unit that comes from irresponsible pet owners.
Other personal circumstances can become sticking points later on as well. Maybe one of your kids wants to paint their room pink (not a standard color most landlords allow), and you are told “no,” or given permission with the disclaimer that you must paint it back to white when you leave. I have never heard of a buyer requesting a seller change paint colors. The same principle extends to other areas like needing storage and wanting the use of common areas or outdoor spaces. Just because there is a basement or attic does not guarantee your use of them. Want to have the family over for a 4th of July barbeque? Well, make sure you clear that with the owner first. When you own the home you can do just about anything you want.
Resourcefulness
This one is a very real thing, and not one enough people give thought to. When you own a home, countless things can and will go wrong; from leaky pipes to flooded basements and everything in between. If you are not mechanically skilled or have good friends who are, the cost of calling in a specialist every time something breaks can add up quickly. After the first few occurrences, it may lead you to watch YouTube videos and become a DIY warrior the next time something breaks. But if you mess something up, the likelihood is that it will now be even more costly when you bring in the professional.
When renting, the landlord is generally responsible for most, if not all, the repair items. This is also a gray area where you should read your lease to know what you need to handle before calling them. Many landlords will expect the tenant to be able to perform minor tasks such as changing light bulbs or plunging clogged toilets, but at the end of the day the unit is still their asset and any damage that results from you trying to fix something on your own should prompt them to make sure they are involved in the solution.
Hidden Expenses
Many people tend to only look at a monthly payment amount when making a purchasing decision, and a home is no different. This is one area, though, where renting can be much more straightforward, but not always. The generally accepted fees all landlords require would be the first month’s rent and one month’s security deposit. If they allow you to have a pet there may also be a non-refundable pet deposit to cover potential damage. Depending on how rigorous the screening process is, you may also be asked to pay for an application fee, background check fee, or criminal history search fee. Yes, they expect you to pay to prove you are a good person.
When purchasing a home, extra fees can add up very quickly, which isn’t to say you should skip any of them – just be aware of what they are and what they cover. Before even getting into a contract, you will likely (and it is highly recommended you do) pay for a home inspection. If you use a mortgage company, they will have a detailed list of fees for everything from the origination fee, appraisal, and potential discount fees (points) if you want to buy a lower interest rate. There is a title insurance fee, homeowners insurance, prepaid property taxes, and potential HOA fees. Depending on what was noted in the inspection report, you are likely to have other maintenance costs to address shortly after moving in as well.
Cash on Hand
This item can vary drastically by region and should not be glanced over. Outside of the credit myth, cash on hand is one of the biggest blockers to people thinking they can achieve home ownership. While there is no such thing as a zero money down mortgage (although there are advanced strategies we will discuss in another blog), there are programs where you can qualify with as little as 3.5% down. Why does location matter?
If the average home costs 500k in your market, the 3.5% option means you need at least $17,500 plus closing costs to be approved. If the average home costs 200k, you are only looking at around $5,700. With those numbers in mind, look at what the average monthly rents are going for in your market and figure out how much cash you would need to move in. Even if the amount needed for a mortgage is slightly higher than the rental option, the difference is invested into an asset you own. Twenty years from now you can sell at a profit and take that money for your next purchase or live out your golden years comfortably. When you leave a rental twenty years later, chances are your rent has increased several times over that period, meaning you wound up paying significantly more than the person with a fixed-payment mortgage and the only cash you can hope to walk away with is your security deposit – if your landlord sees fit to return it!
Discrimination/Hassle
I hate that this section even needs to be included in this blog, but unfortunately, biases still exist. I see them every day when trying to help renters find a place to live. The reason this needs to be stressed in considerations of owning vs renting is that one is governed by the federal government, and at times stricter state and local laws. The other is unregulated. That’s not to say governments don’t try to institute rules for the protection of renters, just that they are harder to enforce than when dealing with banks because all financial institutions must disclose their loan demographics on a regular basis to ensure all demographics are getting fair representation.
If a landlord engages a realtor in the renting of their unit, that real estate professional is bound by fair housing requirements and needs to let the owner know up front that they will not discriminate in bringing forward prospective applicants who meet the financial and credit requirements stipulated at the time of listing. It does not matter what color, race, religion, or any other protected class the renter may come from – they have an equal right to rent. But many owners circumvent this process by asking to interview tenants before signing a lease and then finding another issue as grounds for not choosing them. And when a landlord handles the renting themself, they can discriminate on any grounds they see fit – and do not need to disclose the decline reason to the applicant.
There is a lot to consider when deciding whether renting or purchasing is the best option. First and foremost, the decision needs to be based on what makes the most sense for you and your family, not what other people tell you or fear of the unknown. When in doubt, draw a line down the center of a blank sheet of paper and list the pros on one side and the cons on the other. If you still feel overwhelmed, it might be time to contact a real estate professional who can help you navigate the process.
