There’s a good reason why home ownership is one of the most common goals in people’s lives. It’s a way to build real wealth as you pay down your mortgage over time. It means you’ve finally arrived in the world when you sign on the dotted line and take possession of a place of your own.
Your home is your castle, a place where you hang your hat and memories are made. Also, no one ever dreams of being a renter.
As great as ownership is, it doesn’t always make financial sense to purchase a home. As hard as it is to believe, there are some times when renting is the better option.
Which best describes the benefits of renting a home? Here are instances when renting makes better financial sense than buying:
1. You Don’t Plan on Living in an Area Very Long
There are a lot of expenses involved in buying and selling a home: closing costs, inspections, repairs, realtor fees, and others. The realtor fee alone is usually six percent when selling. This can end up being a lot of money. The realtor fee on a $200,000 home, for example, is $12,000. Ouch!
If you know you will only be living in a certain place for a short period of time – like two years or less – then buying doesn’t make financial sense. Just remember that it sometimes takes months for a home to sell, and you don’t want to keep your money tied up in a place when you’re not going to be there for very long.
2. You Need a Lot of Flexibility
If you move to an unfamiliar place and make a quick decision to buy, you might end up with some regrets. For example, if you move from your parent's house in Denver, Colorado to Austin, Texas, then renting an affordable Austin apartment gives you the ability to scope your new city out without making any long-term commitments.
Let’s say you get a job transfer to a new city you’ve never even been to, and you need a place to live ASAP. If you’re not familiar with a new location, it might make sense to rent – at least for the first year – so you can get a feel for the place and figure out which neighborhood you really want to live in.
3. You Don’t Want to Fix Toilets
Things break in homes. The plumbing occasionally needs repairing, shingles may need to be replaced after a bad storm, foundations crack, and appliances don’t last forever. Taking care of these things requires money, time, skill, and patience – and it may require a lot more money if you prefer to hire people to take care of the repairs for you.
Landlords typically take care of all maintenance issues – unless specifically mentioned in the rental contract. As a renter, you have the luxury of making a phone call to your landlord to set the repair process in motion. This is something that most homeowners could only dream of.
4. You Haven’t Saved for a Down Payment
It’s hard to secure a loan these days without a down payment. And it can sometimes take a while to build up your savings. What do you do in the meantime? You rent.
If you shop around, you should be able to find a decent place to rent that will allow you to save some money each month. It may even be worth it to live an extra 20 or 30 minutes from your job if it allows you to save for a down payment on a home.
5. You Lack Job Security
Purchasing a home and putting down roots in a particular area may not be the best idea if you are unsure of your current work situation. Maybe the company you work for recently laid off a bunch of people – that’s never a good sign. Or perhaps your boss is a jerk and you’re not sure how much longer you can take it.
Losing a major source of income when you have a mortgage payment to make can be devastating. It means you’re stuck in a particular area until you can either sell your home or land a new job. As a renter, however, you have the freedom to pick up and move to a new location in a pinch.
6. You Live in a Big City
Home prices in the best cities for millennials are often very high. In some cities, home prices are simply out of the reach of most people – like in San Francisco or Silicon Valley.
If you don’t have a spare $500k lying around to buy a home in an expensive city but you need to live there for work, you may still be able to afford to rent a place, even if it’s a simple studio or loft apartment.
More Reasons To Not Be a First Time Home Buyer
There are dozens of economic advantages and a warranted feeling of security with being a first time home buyer. Currently, it’s a purchaser’s market as interest rates are still low, hitting 2.88% for a 30-year fixed mortgage this month. It seems like a good time to buy, right, millennials?
However, being a first time home buyer may not be suitable for all. For all of the optimistic reasons for being a home owner, there are some very compelling justifications to not buy a home. What are these reasons you may be asking yourself?
Here are some reasons to be hesitant to purchase your first home:
7. Loss of Flexibility
Owning a home and being a first time home buyer provides a sense of stability and very likely will feel a sense of security even though this may not be a good thing for you.
Millennials are in their career-building years. Let's say you are currently underpaid and the only way to climb the career ladder is to seek new employment in a new city.
Or, you may want to switch fields you might have to relocate to get to that next stage. You need to have the capability to relocate on short notice, maybe even as fast as 2 to 3 months.
Having to sell your home rapidly would force you to offer it up at a loss in order to get rid of it quickly, in addition to incurring 1000's of dollars of closing costs.
8. No Room For Youngsters
Millennials are within the prime years for starting a family and thus being a first time home buyer makes sense, right? You may not have a family now, but the probabilities are you may in the near future.
So, buying that cozy dwelling or condo perfect for the 2 of you is probably not a good idea when a little one makes three. Having to sell your house to buy a larger one with a due date looming can also be unbearably worrying, expensive, and may even cost you a large amount of money.
9. Fives Years In
If for any reason you think you may not be able to stay in your home for five to seven years, you should not buy. It will be cheaper to rent. The rule of thumb used to be seven years, but now that the housing market is stabilizing, that timeline has shifted slightly.
With only moderate market appreciation, it will generally take five years for you to recoup the costs of buying, selling, and carrying costs. Unfortunately, in the first years of your mortgage, you won’t be building up too much equity. Banks charge a hefty portion of your interest upfront, with very little going to your principal in the first few years.
10. No Money Down, No House
If you don’t have enough money saved for a down payment, don’t be a first time home buyer. I am a big proponent of 20% down. That is not always feasible for most Millennials starting out, and it is lot of money to have saved up. But, unfortunately, it is the safest, most conservative approach to home ownership. If you can’t bank on Mom and Dad for a leg up on the down payment, then you need to keep saving
11. Too Much Debt
Student loans, car loans, and any other debt you have accumulated are all reasons not to buy a house just yet. You will need to pay down your debt first. Not only will a being a first time home buyer put a dent in you debt reduction plan, banks will not be willing to approve you for a loan with a high debt-to-income ratio.
12. Shaky Job Security
First, purchasing a home with today’s new qualified loan standards requires some consistent job history. When you’re in the early stages of your career, there may be jumps and gaps in your history, so getting the loan is going to be a challenge.
Once you own a home, be aware that job situations can change overnight. Losing a job, periods of unemployment and changes in income are not as easily weathered when you own a home. Your income may change, but your housing costs will remain the same. You won’t be able to quickly downsize, leaving you to sell your home out of financial desperation.
13. Cash Poor
Being a first time home buyer often leaves buyers cash poor. After you dip into your savings to come up with the down payment, the closing costs, and any renovation that you need to make prior to moving in could leave your bank account in the double digits. That is not the way you want to start living the ‘American Dream.’ Make sure you will have enough cash leftover to weather a job loss, an unexpected emergency, or even a health issue that could impact your earning power. Don’t end up house rich, cash poor and emergency fund-less.
Before You Buy
Always take the time to make sure buying makes sense before you sign on the dotted line and commit to a lengthy mortgage. Depending on your situation, you may actually come out ahead by renting instead.
If you want to save money on housing (typically your biggest expense), check out how to live rent free and the fundamentals of house hacking.
The True Cost of Renting vs. Buying a Home
Choosing between renting vs. buying a home is overwhelming. There’s plenty to consider — and each situation is unique — but here are the facts.
For many people, owning your own home is considered a major success symbol and an essential part of the American Dream.
Yet, in recent years, socioeconomic changes have overhauled the way we live — and have impacted the way we view home ownership. Especially for millennials, home ownership isn’t as accessible as it has been for previous generations, with escalating inflation, static salaries and soaring student loan debts.
These days, the idea of owning your own home is more often seen as a luxury than an attainable goal. Too many people have convinced themselves that renting is the most affordable choice, without really considering all of the available options.
So, is buying a home too difficult for millennials? Is it really better to rent than to take on a mortgage? Let’s take a look at the true benefits (and drawbacks) of renting and buying, along with a few new, emerging solutions that make home ownership more accessible.
Buying a Home: A Millennial Problem
In today’s housing market, millennials are the demographic most affected by the rent-vs-buy conundrum. More than other generations, they’re particularly likely to be impacted by certain financial factors that make owning a home more challenging.
In particular, staggering student loan debt can cripple a monthly budget, making mortgage payments more unaffordable and make saving for a downpayment very difficult. Plus, loans can also prevent young consumers from building up a good credit rating.
Also, many millennials are often required to move from state to state to successfully navigate the current job market, making home ownership challenging for the time being.
And, studies show that 68 percent of millennials who already do own homes regret their purchase, primarily for financial reasons. These include underestimating hidden maintenance costs (such as plumbing bills) and not being adequately prepared financially for those relentless monthly payments.
Buying and Renting: The Facts
Choosing whether you should buy a home or continue to rent can be overwhelming. There’s plenty to consider — and each situation is unique — but here’s a quick overview of the primary pros and cons of buying and renting:
Pros & Cons of Renting a Home
Pros
- Benefits You aren’t locked into a mortgage for decades
- You have the flexibility to move
- Fewer maintenance costs and responsibilities Fewer or cheaper utility costs No real estate taxes.
Cons
- Since the home isn’t yours, you pay without accruing any equity
- No control over the property — it could be sold at any time
- Restrictions over landscaping, decorating, remodeling or improvements
- Restrictions over lifestyle choices, such as pet ownership
- You’re stuck in a lease for, most often, at least 12 months
- You won’t have any property to leave your children — or sell for quick cash when you retire
- Rents can increase regularly, even in a rent control building — unless you learn how to live rent-free
- Rentals can carry expensive hidden costs such as renter’s insurance, extra security or pet deposits, and other fees imposed by your landlord.
Pros & Cons of Buying a Home
Pros
- The home is yours, and you have control over lifestyle decisions, like having pets
- You don’t have to follow anyone else’s rules You have control over maintenance, remodeling, decorating and home improvements
- You can lock in a fixed-rate monthly payment
- If your home appreciates in value, you’ll build up equity with every year that passes
- In many cases, a monthly mortgage payment may be cheaper than renting
Cons
- You’re responsible for maintenance, remodeling and necessary improvements
- You’re responsible for all utilities and fees
- You’ll have to pay property tax
- You’ll have to pay homeowner’s insurance, plus you might have to buy flood insurance and other relevant policies
- You’ll have greater liabilities and more responsibilities
- You’ll be locked into a certain location, unless you rent or move
- There may be unexpected, hidden costs
More Options are Emerging to Buy a Home
For a long time, owning a home meant either buying it outright, or, more often, finding a lender and taking out a mortgage. This is changing, and the options for buying a house are no longer quite so black and white.
Now, more options are available for aspiring home owners that can help make the process easier and more accessible.
The Co-Investing Model
One new financial model is co-investing. When you co-invest in a home, you make an initial investment in your house, just like a down payment, and another company co-invests with you, covering the remaining cost of the home.
Instead of lending, co-investors share the equity in your home when you sell, treating it as an investment, and in exchange, you get reduced monthly payments.
Haus is one of the newest companies offering a co-investment home ownership model. Rather than getting a mortgage from a bank, you can partner with Haus to purchase a home or restructure your current financing without taking on new debt.
When you buy with a co-investing model, you’re usually required to contribute a minimum ownership stake in your home. With Haus, you put down at least 10 percent of the home’s cost, and they put in the rest, then you make fixed payments for 10 years, purchasing more equity each month.
One big benefit: under this co-investment model, your monthly payment averages 30 percent less than a traditional mortgage payment because you’re also sharing some of your equity when you sell.
And with lower monthly payments, you can afford to pay down student loans and other monthly bills. Best of all, with a co-investor you’ll still have full ownership of the house, with your name alone on the title.
Another unique feature of some co-investing models, including Haus, is the flexibility to cash in and out of your equity without resetting your term or taking out an expensive home equity line of credit.
With Haus, you can buy more equity whenever you want, or sell equity for cash if you need it — it’s up to you. Whether your home appreciates or depreciates, Haus remains your investment partner.
If your home value goes up, everyone wins, and if it goes down, as your co-investor, Haus helps shoulder the burden. At the end of the ten-year period, you can partner with Haus again, sell, or purchase your home outright.
For many millennials, co-investing is a new option that offers control, equity and ownership, all combined with lower payments and more financial flexibility.
Rent-to-Own
One more option is rent-to-own, which allows you to pay the seller an option premium — typically five percent of the purchase price. In return, the seller will allow a portion of your monthly rental payment to go toward purchasing that home at a later time.
Rent-to-own is an attractive option for buyers who can’t quality for a home loan due to bad credit, and it can also help you lock in a purchase price. That being said, there are a few drawbacks, including losing the premium if you don’t end up buying the property, or having little control over the property itself.
Also, if the housing market falls and prices are lower, chances are you won’t be able to negotiate a lower purchase price for the home, which means you’ll end up paying too much for it.
The Lowdown: Which is Better?
Especially when it comes to buying a home, everyone’s situation is unique. Since everyone has a different lifestyle, there is no singular answer. For some people, it may be easier or more financially viable to avoid committing to a property and continue paying rent.
For many other people, home ownership is vastly preferable for many reasons. Home ownership provides lifelong equity, which can later be sold or passed down to future generations. Plus, it can often offer more stability, more control and more freedom in where you live.
More than ever before, aspiring homeowners have a range of options to consider when thinking about renting or buying a home. The most important thing of all is to take a close look at your individual financial and lifestyle situation and make a decision that’s right for you.
