The discussion concerning home ownership vs. rentals almost always leads to a passionate debate about which makes more financial sense. Both arguments do have valid points, which may make it confusing to choose rentals over home ownership. The most common argument in favour of home ownership goes along the lines of ‘Why would I keep a rental with a landlord instead of raising equity for a home?’ In reality, there are many financial reasons why rentals may be more compelling. You must also ensure that you are in a financial position to even consider home ownership over rentals. What is more, rentals are preferred when your social and professional life is not in order. Here are a few reasons why rentals may turn out to be more advantageous for you.
Few people realize that rentals do not come with such high cost as home ownership. There seems to be a widely-held opinion that buying a home makes more sense than rentals. Sometimes you may hear that every cent you pay in rentals is a cent you’ll never see again and that home ownership is a great investment. Rentals isn’t a waste of money. It is correct that you don’t see your money again, but you are getting something in return, i.e. rentals provide you with shelter for yourself and your family. Keep in mind that when you buy you’ll spend much money on interest payments, taxes and other fees, and that is money you will never see again. These non-rentals payments are not helping you build equity.
When considering rentals vs. home ownership you need to think about the true cost of home ownership and to perform a thorough examination of all related costs. You may think that a mortgage payment may be less than your current rentals, but that mortgage is just part of the story. For some, the associated costs of home ownership might be as high as 5-10% of their mortgage, so the comparison to rentals needs to include all costs. What might those home ownership expenses be that you do not get with rentals? The list below is not exhaustive and does not take into account the additional cost of new furniture, upgrades or equipment new home owners often find themselves buying. Here is what you don’t incur in rentals:
After seeing that list of expenses, you may start doubting that rentals are more expensive than home ownership. Rentals in fact are preferred if you know you won’t live there for at least five years. Why is that? For one, home ownership for 30 years lets you offset closing costs by the growth in your home value provided the real estate market is with you at that time (rentals market swings much less, buy the way). If you decide against rentals but still only own your home for four years chances are the home’s value won’t have increased, which in effect means that closing costs will make you lose money on your investment. What is more, unlike rentals where payments are equal month over month, mortgage payments at the beginning of the term go disproportionately to interest rather than principal.
To decide if it makes more financial sense to go for rentals or home ownership you need to compare the total rentals cost with the total cost of home ownership. Both rentals and home ownership involve many assumptions that are unique to you. The more accurate your assumptions related to a rentals situation are, the more accurate your conclusion would be. In general, it’s tough to predict how long you would own a home, which is why with rentals you have one major benefit, i.e. being flexible. In general, with rentals you pay much less (if anything) up front. While many landlords ask for first and last month’s rentals payments as a security deposit, this is still less than what you’d likely pay for a down payment. With rentals, you may not be able to update or personalize your living space, but your rentals landlord is responsible for fixing broken items. There is some risk that in the future your rent may increase, but rentals are flexible and relocating or re-negotiating may be easier. What if you move cities or change jobs in the near future? Rentals require much less responsibility than home ownership in such situations.
All in all, while rentals may not be the preferred option for each of us, evaluating your options for rentals against home ownership is a worthwhile exercise that you should not overlook regardless of your current opinion on rentals.