Guest Author - Reshma Vyas
Home ownership has long been regarded as a cornerstone of financial security and a significant indicator of upward mobility. Renting, in sharp contrast, has historically been viewed as something of a stopgap measure; merely a transitory phase for individuals aspiring to eventual home ownership. However, there are situations when renting offers several distinct benefits:
• Flexibility. Real estate is not a liquid investment. During times of tremendous economic uncertainty and job scarcity, renting affords the crucial advantages of freedom and flexibility. There is nothing more problematic and stressful than having to sell a home during an economic downturn. The difficulty of having to unexpectedly sell a home due to job loss or illness is greatly exacerbated if your home is located in a region particularly hard hit by a higher rate of foreclosures and unemployment.
• Worry-free maintenance. Not having to worry about having the garbage disposal fixed or a ceiling leak repaired is one of the biggest benefits of renting. The headaches and extra expenses of home repair and maintenance are passed on to the landlord or real estate leasing company. This frees up your money, time and energy for other activities. In reality, though the rent paid by the tenant generally covers the expenses for repair; overall, renting is still less costly and more convenient.
• Reduced financial overhead. Often, many potential homebuyers believe that their expenses will actually decrease once they purchase their primary residence. While the tax breaks associated with home ownership are indisputable, there are many unforeseen costs associated with home ownership that go well beyond those for maintenance and repair, HOA dues, insurance and property taxes. Over the past several decades, homes have not only become increasingly larger but the sheer variety of amenities has dramatically expanded and continues to expand. A home is not so much about shelter as it is about lifestyle and to some degree, status. Homeowners today are far more discerning in terms of their preferences, leaning towards a whole range of indoor and outdoor amenities such as uniquely designed sunrooms, decks, patios and gazeboes, garden spaces and elaborate outdoor rooms for entertaining. Aside from luxurious kitchens and bathrooms, other rooms such as dens, gamerooms, hobby rooms and finished basements are becoming important focal points. As the list of amenities expands so does the cost in terms of initial outlay and continued upkeep. Lost in the shuffle is the principle of a home as secure shelter. Yet, the delicate balance of proportion and comfort is for each individual to determine.
• Work on credit and financial goals while you rent. Renting is practical when you are on shaky financial ground (e.g., you need to rebuild your credit and savings).
Not Necessarily A “Great Investment!”
In the final analysis, a house is just “bricks and mortar”, something which many individuals conveniently forgot during the heady days of the housing bubble. A house is not an ATM. Real estate ownership may or may not yield profit and is hardly a guaranteed path to wealth.
In some instances, depending on the particular market, renting is a far more financially sound decision. Paying $400,000 for a 680 s.f. 1BR condo in an expensive metropolitan area is not necessarily a bargain, all things considered. There are several crucial factors that need to be weighed to sufficiently assess whether or not such an expensive price for a small scrap of real estate is truly a worthwhile “investment.”
• Calculate the amount paid per square footage to understand how much you are really paying for the 680 s.f. condo. Then, evaluate rents for comparable units. Add the additional expenses of closing costs, condo fees, insurance, PMI (if applicable) and taxes.
• The presumed desirability of the location is not a fixed variable. A long-term regional market downturn could substantially decrease the price of the unit. Prices could fall and one could end up owing far more than the actual worth of the condo unit. Public perceptions about the locale could also change.
• Assess the present and future level of debt to live in 680 square feet. Condo fees and property taxes are also likely to increase over time.
• One’s current life stage needs to be evaluated along with possible future changes in lifestyle and interests. Income does not correlate to wealth. How much does the “affordability” of the condo hinge on the ability of the potential buyer to consistently earn a paycheck? What if there is a job loss or sudden illness? Without adequate income, how could the individual meet the expenses of owning the condo? If one is paying in cash and has more than enough in the way of financial funds to comfortably afford the condo fees, insurance and taxes, then fortunately it is another matter.
Neither renting nor home ownership is a win-win proposition. The choice between renting and home ownership is an individual decision. It is influenced by a large number of monetary and non-monetary variables and calls for a great deal of personal thought and financial analysis.