Here Are the States Whose Residents Are Really Best at Managing Their Money
As recently reported by CreditCards.com, the state whose residents are best at managing their money...
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I recently read a piece called “Buying vs Renting A Home (DEBUNKED),” where the author makes the case that renting is much better than buying for a variety of reasons mostly having to do with how little of your payment goes toward the principal for many years, and all the other expenses of home ownership.
As a landlord myself, I’m all for people wanting to rent, especially my properties :). However, I believe most people in most situations would do better buying their own homes.
Owning a home is not cheap where most of us live. Here are the biggest expenses and how much they’re likely to cost per year.
For this analysis I assume the same $360,000 mortgage at 4.25% assumed in the above-mentioned piece, but will assume a home value of $450,000 rather than the $400,000 stated there, because a 20% down-payment is a much better idea than one of 10%.
Putting these all together, we come to $28,683 for the first year, with the mortgage interest decreasing gradually from year to year as you pay off your loan. In monthly terms, this is $2390 on average each month.
Since most renters pay their own utilities, we subtract that expense, leading to $25,308/year or $2109/month on average. What’s more, over time your interest payment drops, making your true annual cost lower.
Thus, if you’re planning to live in a home that costs $450,000 and can rent it for less than $2100, you should consider doing that (see below why that’s not likely to happen).
Another matter is the portion of your monthly payments that goes to reduce your outstanding principal. This is not an expense! It does affect your cashflow and needs to be covered each month, but it’s really a self-imposed investment in real estate, specifically in your home’s equity.
Payment against Principal is not an expense. It does affect your cashflow and needs to be covered each month, but it’s really a self-imposed investment in real estate, specifically in your home’s equity.
Clearly, owning a home isn’t cheap where most people live in the US. However, there are two critical points that most analyses miss when they argue that those expenses are a reason to not buy.
First, your choice isn’t whether or not to pay for housing by buying a home. Your real choice is between buying a home or renting it.
Second, and far more important, there’s another party to the rental lease, the owner, who’s in this as a business.
Unless you think he’s inept (usually not a good bet), he already calculated all his costs, added the impact of principal repayment on his cashflow, tacked on a healthy 10–20% (or 50–100%) profit margin, and used all that to figure your rent.
This means that when you rent, you don’t avoid paying the expenses of home ownership or the cashflow burden of paying down the mortgage principal. You’re simply paying all of it for your landlord through your rent.
When you rent, you don’t avoid paying the expenses of home ownership or the cashflow burden of paying down the mortgage principal. You’re simply paying all of it for your landlord through your rent.
As is true for every aspect of personal finance, it depends on your individual circumstances. Here are the main situations when buying a home is a bad idea, and potentially a disastrous one.
There are several other considerations that may affect your decision.
Analyses that cite the high costs of home ownership as an argument against home ownership miss several critical points. Most importantly, that the landlord sets your rent based on his costs of ownership, plus a profit margin. Thus, you don’t avoid those costs by renting. You simply pay them for someone else, and have nothing left to show for it in the long run.
While there are circumstances when buying a home is a bad idea, in most cases, if you can afford it, it’s much better than renting long-term.
Have you asked yourself if you’d be better off buying or renting? What were your considerations?
About the author:
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.