What’s the big deal about owning a home, anyway?

Because if we can’t address that question here, where else?! So, what’s the real difference between renting and owning? Wait; is there another option? Unless couch surfing indefinitely fits your lifestyle, then I’m not aware of a third option. Although let’s set one thing straight, I did spend a good chunk of two separate summers in a camper van, which I would consider an alternative option; but one must own, rent, or borrow the van, yeah?

Now, back to the big question up top. Normally, I’d go into a well-prepared speech about all of the benefits of home ownership, of which there are many. But this post isn’t exactly about that, although I will highlight some of those throughout the next few paragraphs. This post, and this website, really, is focused on what it feels like to be home. So, while paying your own mortgage instead of your landlord’s may feel like an accomplishment to one person, it might feel like the opposite, or something else entirely, to someone else. It might not be a priority at all. It really depends on what you value, and there are no wrong answers here.

If we consider that both opinions could be real and valid, then let’s explore them both a little more. For clarity’s sake, let’s call one the “owner” and two the “renter”. The owner might already have practice in making financial decisions and sacrifices for her future self, like giving up her daily Starbucks in order to put some cash away for a down payment. She might love the feeling of freedom that owning provides, like she could renovate the bathroom or knock out an obstructing wall somewhere, if she were to choose to do so. Owning also comes with the requirement of care (or paying someone else to), including regular cleaning, maintenance, and other items depending on the property. Saving for repairs and improvements is also something to consider. On the flip side, the renter might love that everything is taken care of with one monthly payment. No mowing the lawn, fixing leaky faucets, or worrying about replacing the roof someday. Everything is exactly as it appears - what you see is what you get. She can come and go on her own time, but may not have the same flexibility in making the space reflect her style.

So .. what gives?! It seems like there are pros and cons for both owning and renting. Which is true! This is where it becomes really important to consider your priorities. What is going to help you feel most at home? First, of course, think about where you want to live. In the middle of a big city? Somewhere on the outskirts? Way, way far outside of any city limits that the only other living beings you see daily are birds and squirrels? In the middle of a suburbia neighborhood, or on a city block in a quaint small downtown? Think about what kinds of properties are available in the place you’d most want to be. How much time will you be spending at home? What best suits your style, and can you afford it along with your lifestyle? Do you need to adjust your criteria in order to rent/buy/visit?

Your financial advisor might suggest that the renter will have nothing to show for their investment after their lease is up, but I’m going to challenge that thought.

Traditionally, we are taught that investing in a property is a wise decision. You save up some cash, find the right place, make an offer and (hopefully) it becomes yours (thanks of course to the bank’s loan, which also gives them an interest in the property). Let’s say that in 5 years, you’ve worked your way up the ladder at work and have received multiple raises, giving you a bigger budget to work with. You’re also working a few more hours each week, and spend a lot of time at the office. You decide you’d like to be a little closer to shorten your daily commute. It’s time to sell your current property and buy a new one. Historically, the housing market sees a slight general increase in home values year over year. Well, this was true until the financial crisis of 2008, but we’ll set that aside for the moment. You have taken good care of your first home, and yo'u’ve seen a 5% increase in the value since you bought it. At a $300,000 original purchase price, your new market value is $315,000. Let’s say you had a 3% down payment at the time ($9,000) and have made all of your payments on time. Over the last 5 years, you’ve made a total of $105,000 in payments (not including property taxes or insurance); $84,500 of that has gone to pay the 6% interest fee on the loan. Your principal balance is down to $270,500. When you sell the property, you’ll have fees and closing costs, which will amount to somewhere around $20,000. You’ll walk away with about $24,500 for the down payment on your next home. What we often don’t talk about is the cost of ownership - not yet considering additional costs (taxes, insurance, and repairs), the net loss is about $69,000 over 5 years, or about $1,150 per month on average.

Now, let’s say you decided to rent at the time, with a similar monthly payment. For the sake of this conversation, we’ll keep the numbers exactly the same. In the above example, the monthly principal and interest payment was about $1,750. At the end of the 5 years, you’d have spent $105,000 (same as above), or about $21,000 per year. At the end of this example, the owner comes about $36,000 ahead, which is why most professionals argue that home ownership is among the leading net worth growth strategies. One key point to call out here is the amount of interest per payment decreases year over year, so in this example the interest cost during years 6-10 amounts to roughly $77,250 (about $7,250 less than years 1-5). Another thought to consider would be the overall borrowed amount. If the owner in the example had saved up enough to make a 5% down payment ($15,000), the interest on the amount borrowed decreases to about $82,600 over the first 5 years, or a net savings of about $1,900.

Here’s where things get interesting .. because, let’s say both people in the example above had the same $15,000 to start with. One (owner) invested $9,000 of it into the first home as down payment; the other (renter) invested $9,000 in a 5-year CD with a 5% interest payout. At the end of the 5 year term, the renter would have made a net profit somewhere around $2,000. Now, there are many more scenarios available to consider, but I hope you see the point I’m trying to make .. the owner has come out of the 5 years with about $34,000 more in net worth / value (provided everything else in comparison was the same). :This may help the owner (now seller) feel like they have more options to choose from, moving forward. Obviously, there are SO MANY more parameters and costs to consider, but I wanted to break this down in an illustration so it could be relatively simple to see the difference. I hope it was helpful!

Now obviously, I realize that owning vs. renting isn’t just about the money, which I referenced earlier. There are many reasons, lifestyle and otherwise, that can make renting a more appealing option, both short and long term. Maybe your job/career is highly likely to transfer locations often, or you simply prefer to be able to up and move across town (or the country). Maybe maintenance isn’t your thing, or you really don’t have time for it. Whatever the reason you have for choosing to own or rent, I hope I’ve made one thing clear: a home is generally not a short-term investment. But it can be a great investment over time!