Edited by Scott Brown EBS CONTRIBUTOR
It is hard to believe that in the midst of one of the most difficult periods in our nation's history, average house prices in the United States rose to a record high of $ 330,000. Meanwhile, in the face of the COVID-19 virus and its blockages, George Floyd protests and riots, and probably one of our most divisive political circles and presidential election cycles. Given this environment, I would like to "pass" on rent compared to your own debate.
As a great philosopher once said, "Home is where the heart is found". This may be true, but the quote only adds to the complexity of this topic as deciding whether to rent or buy a place where you live is an important decision in life. It affects your lifestyle, your savings decisions, cash flow, flexibility, family traditions, memories and perhaps even your taxes to name a few. Personal finance is nothing short of personal. That said, fewer financial decisions can have a bigger impact on your money than whether or not home ownership is the right thing for you and your loved ones.
Since the injury is often towards property, let's start from there. The positive aspects of the purchase include: a forced savings program (monthly mortgage payment), investing and finally possessing a valuable and probably appreciated asset, tax deductibility of interest on mortgages, pride of ownership (the American dream), predictability of monthly and annual costs (no increase in rent or non-renewed leases) and, finally, stability (being part of a community with lasting relationships, schools for your children, etc.).
The downsides to buying include one-time home ownership costs that cannot be managed from 6 to 12 percent or more of the home's value (mortgage origination fees, closing costs, real estate agent costs). Further downsides include ongoing costs such as mortgage interest, homeowners insurance, property taxes, as well as maintenance and repairs. Some costs are deliberately left here, as if they rented them they would probably be transferred to you (utilities, condominium or HOA expenses, tax increases and even some maintenance, repair and improvement interventions).
Perhaps the biggest advantage of renting is flexibility. You have the option to move every time the lease ends. You can choose to oversize, resize, urbanize, suburbanize, follow your passions, your career and invest the cost savings as you prefer (rent and invest the difference). You also have greater predictability in your monthly living expenses as you will not be hit by an unexpected expense such as replacing the roof or a large appliance.
The negatives include, no deduction of interest on tax mortgages, lack or at least one less forced savings plan (no home equity or appreciation), uncertainty in your life situation knowing that you may be forced to move suddenly. Referring to scenarios such as, if the landlord decides to sell the property, turn your apartment complex into condominiums or increase your rent by passing what's convenient.
Questions to consider that can help you decide which path is best for you include: How long do you plan on living at home? What is the cost of residential property in the desired area? What is the average annual increase in the price of residential property in your city? Do you have ties to the community? Do these links outweigh any logical reasoning for you? You also need to consider the opportunity costs of things like taxes, insurance, down payments, not having a forced savings plan among other things.
Contrary to popular belief, renting doesn't mean you're "throwing money away" every month, and owning doesn't always create "long-term" wealth. The rent against your own debate will persist and, in my opinion, the answer is extremely personal, circumstantial and sometimes complex. To quote the great Yogi Berra "When you get to a crossroads, take it." Or as far as I'm concerned, if the question is which one do you prefer, mountain bike or road bike, my answer is simply "Yes, please!"
Whether you are living in your home forever or not, I simply hope you feel comfortable with your current living regime and continue to stay safe during these difficult times. Last but not least, keep setting your sites on your goals and enjoy the trip!
Scott L. Brown is co-founder and general manager of Shore to Summit Wealth Management. His career in wealth management has lasted more than 25 years and he currently works and lives in Bozeman with his wife and two children.