Everyone dreams of living the good life and being comfortable and this dream is the dream of having all the basic needs and also having things that communicate value. For example, having a dream job, a dream car, or even a dream home. There is a sense of accomplishment that comes when you achieve all these things and part of that is owning your own home. Before you decide that you want to become a homeowner there are things you need to consider. While it is true that buying your own home is a great accomplishment, it does not mean it’s the best option. Sometimes, renting may be the best option and I’m going to share with you five reasons why that is!
Reason #1: You Can Avoid Agents Fees
The first expense you have to consider when determining whether or not you want to become a homeowner are agent fees. In some countries, buying a home will include the cost of your buying agents services. Typically, these costs are a percentage of the home’s value which is tacked on to the purchase price of the home. However, this expense is not always bared by the buyer. In fact, when I bought my home I paid absolutely nothing in terms of realty fees but it comes with a catch.
You see, once you buy, you will almost certainly end up selling the house at some point and then you will be on the hook for the selling agents commissions. When you decide to sell your home, you will need a real estate agent that will advertise your property and look for buyers for you. This commission fee can sometimes be as high as 6%. This may look like a small amount but it definitely take a toll on your total proceeds. For example, if you are selling your $500,000 home, you would be handing over $30,000 to your agent which could be a significant portion of the down payment for your next property.
Renting a property is usually simpler. A simple search online can list all the properties available for rent in a certain location and most times you get to talk with the landlord who is also the owner of the home. This removes the agent fee that you would have paid if you were to buy instead. For this reason, it is better to rent a home instead and cut out these extra fees.
Reason #2: Renting Avoids Debt
The second reason that renting is preferable over owning is that renting allows you to avoid taking on hundreds of thousands of dollars worth of debt. You see, most people cannot buy a home outright in cash which means that they need to borrow funds from the bank. As a matter of fact, the amount of mortgage loans that is owed annually is in the trillions of dollars worldwide but you can avoid adding to this figure if you decide to rent instead.
The price of buying a new home is usually too high, so most people consider the option of buying on a mortgage loan. This is how it works. You pay a certain percentage of the total cost of the property upfront and then use a loan to pay up the remaining part. This sounds like a fair deal but is it really a fair one? The average price of most new homes are $500,000. Let us assume that you get a mortgage that allows you to pay just 10% upfront fee, which would require a down payment of $50,000. This is a small amount compared to the actual price but the average person will need several years to be able to save up to this amount. Buying a home, in this case, means that you will have to withdraw all your savings.
The easiest way to avoid debt is to avoid buying a home. Now, if you have the money for a down payment and want to build equity then that’s fine but just know that you will be in debt for the foreseeable future and for some people, that financial stress is something they would rather avoid.
Reason #3: Less Financial Responsibilities
One of the reasons why most people are not able to buy a home is that they cannot afford one. Buying a home will cost you a lot of money and you may be considering the option to lower your financial responsibility. Renting a home means that you can save on numerous costs which ultimately allows you to keep more of your hard earned money.
One of the misconceptions about renting versus owning is that it is always cheaper to buy than to rent in the long run. This is not always true as it can be more expensive for you to buy in the long run compared to when you rent. So if you want to reduce your financial responsibility you have to compare the two options and chose the one that works best for you. There are several factors that will determine whether buying a home will be cheaper in the long run than renting. For example, the location of the home you want to buy will determine whether its value will increase over time or not. In fact, in this video, you are going to see some instances where renting will help you spend less than if you were to own.
As a homeowner, you have to constantly do maintenance and repairs on your home. This is a large expense that can be avoided if you rent a home. If something goes wrong, your landlord will be in charge of doing the maintenance and the repairs that are necessary. For instance, if your roof is leaking, you can easily call your landlord to come to fix it. This is not the case when you buy a home. You have to do all the repairs by yourself with your own money. Sadly, some repairs will be expensive and again this will eat away at your ability to save and invest.
Don’t get confused when people tell you that renting is throwing away money. The truth is that your money is not lost when you pay rent as you are gaining utility from that space in the form of shelter and comfort. In fact, there are hidden fees that you will have to pay if you buy a home so the true price is more than what you actually paid initially. You will have to pay property taxes and insurance which are just a few items you avoid as a tenant. So before you make a decision that buying a home is more financially prosperous than renting, you must factor in all the costs.
Reason #4: More Flexibility
Renting instead of buying gives you more flexibility. You are not restricted to a particular place and can easily move if your life situation were to change. Homeowners, however, do not have this same level of flexibility. Once you plant yourself in your home, you’ve already incurred a ton of one-time costs and would have to incur more if you wanted to sell. It’s for this reason that as a rule of thumb, if you are not going to live in an area for more than 5 years, the best advice is that you should not consider owning a home but rather renting.
But what would force you to move in the first place you may be wondering? Well, you may be offered a new job opportunity in a different city or perhaps you have a love interest that lives abroad. When you rent a home, it is easy to move but when you own a home it becomes difficult. A homeowner would have to put their house on the market, wait for an appropriate offer and then sell, whereas a renter could give his or her notice and leave. Sometimes, finding an interested buyer is a challenge and you may end up selling it for a value lesser than the current market price just to break even.
Another thing that makes renting the best option if you want flexibility is because you can stay wherever you want. You can easily have access to urban areas with high social and infrastructural development. It will be expensive to buy a new home in such places but affordable if you are going to pay rent. Renting also gives you access to some basic amenities that would otherwise be too expensive for you to set up in your own home. These things include having access to a swimming pool or fitness center in your rented home and if for any reason you decide to move to another location you can do that with ease.
Reason #5: The Opportunity Cost of A Down Payment
The final reason it is better to rent than own comes down to a cost that most people overlook. Simply put, opportunity cost is the cost of an alternative forgone and when you put down tens of thousands of dollars on a home as a down payment, renovate your house or pay your property tax bill, that money could have been used elsewhere. For example, if you buy a home that’s priced at $400,000, with a 20% down payment then you would have given the seller $80,000 of your hard earned cash. This money will sit as equity in your home and as the property rises in value, this initial $80,000 investment will increase.
Let’s say that homes in your neighborhood are appreciating at 4% a year. After 10 years, your initial investment would have risen by almost $40,000 to just less than $120,000. That sounds pretty good right? Well, what if that large sum of money was investing instead while you rented? If you were able to achieve the stock market historical return of 7% then that same $80,000 would be worth almost $160,000 or nearly double. So what is the opportunity cost in this case? Well, it’s the difference between the home appreciation and the market appreciation or in this example $40,000. Not to mention, this doesn’t even consider other expenses like property taxes and home insurance that could have been invested too if you decided to rent rather than buy.
Now, if you ask me I would rather have earned that extra $40,000 but this is just the tip of the iceberg when it comes to opportunity cost. You see, to save up that $80,000 down payment, you would have likely had to have saved for numerous years. Assuming you saved $1,300 a month for 5 years to amass that down payment which you left as cash in your bank, you would have given up a massive investment opportunity. You see, investing $1,300 a month for 5 years at 7% would have left you with over $93,000 rather than the $80,000 you would have if you were to earn and save during that time.
But, the final opportunity cost that just about everyone overlooks is your time. Your time is valuable and when you own a home versus renting you tend to have a lot of responsibilities. For instance, as a homeowner, you need to care for the property, attend to appliance issues and do regular inspections of the home. However, as a tenant, you are basically absolved of all these responsibilities. Your living quarters becomes a very hands-off responsibility and all you need to focus on is paying rent on time and keeping it clean. With all this freed up time, you can work more or enjoy your free time rather than doing boring homeowner chores that will take time that you will never get back.
Therefore, while owning a home is all the rage, there is a strong argument that renting may just be the way to go!