Owning vs Renting

The VA home loan provides veterans an outstanding mortgage option. But, many people ask whether buying a home makes sense for them. More precisely, is buying a better option than renting a home? As such, we’ll use this article to outline the major pros and cons of owning vs renting a home.

Specifically, we’ll discuss the following:

• Pros of Owning a Home
• Cons of Owning a Home
• Pros of Renting a Home
• Cons of Renting a Home
• Final Thoughts

Pros of Owning a Home

Pro 1: Build Long-term Wealth

The primary advantage to owning over renting involves long-term wealth. When you pour money into rent every month, none of those dollars build your net worth. But, when you own a home, you build long-term wealth in two ways.

First, through loan amortization – the process of gradually paying down your mortgage – you build wealth. For example, say you have a $200,000 mortgage on a home valued at $300,000. As you make your monthly mortgage payments, that $200,000 loan decreases. And, with each dollar your loan balance shrinks, your equity – or ownership – in your home increases. Assuming no change in value, when your loan balance decreases from $200,000 to $150,000, your equity increases from $100,000 to $150,000.

But, property values do increase. Even accounting for short-term fluctuations, property values tend to consistently increase over time. This leads to the second way owning a home builds long-term wealth: property appreciation. Simply put, the longer you own a home, the more valuable it will become. Yes, inflation will offset some of these gains, but, on average, property appreciation has historically outpaced inflation.

Pro 2: Access to Low-interest, Long-term Loans

In addition to the wealth-building benefits of owning a home, home ownership also comes with outstanding loan terms. With most credit (e.g. personal loans, auto loans, credit cards, etc.), borrowers face relatively high interest rates and short repayment periods. With 30-year mortgages, borrowers can access low-interest, long-term loans not available elsewhere. These loans allow you to finance the purchase of a home – typically people’s largest life-time purchase – with extremely affordable terms.

Pro 3: Tax Benefits

Owning a home also comes with major federal tax benefits. First, homeowners with outstanding mortgages can deduct a portion of their mortgage interest from their federal taxable income. Known as the Mortgage Interest Deduction, this benefit allows homeowners to deduct the interest on their first $1 million in mortgage debt when filing federal income taxes.

Additionally, homeowners receive a tremendous tax benefit when selling their home. Normally, when you sell an asset that has appreciated in value, you must pay a capital gains tax on that increase in value. But, when individuals sell their primary residences, they can exclude up to $250,000 in capital gains ($500,000 for married filing jointly) from their taxable income.

Pro 4: Stability  

While less tangible, homeownership also offers stability. When you own your home, you know exactly where you’re going to be living, and you know how much you’ll need to pay to live there. For individuals seeking roots in a particular area, owning a home simply offers more stability than renting.

Cons of Owning a Home

Con 1: Fixed Costs

But, owning a home isn’t without associated disadvantages. In particular, homeowners face the following fixed costs. If they don’t pay them, they run the risk of foreclosure or liens placed on their homes:

• Mortgage principal and interest
• Property taxes
• Homeowners insurance
• HOA fees (as required)
• Flood and earthquake insurance (as required)

Con 2: Maintenance costs

Additionally, homeownership comes with recurring maintenance costs. If the dishwasher breaks in a rental, you just call the landlord and it will be replaced. But, when you own a home, you’re responsible for paying for these maintenance costs. And, while fixing a broken dishwasher may not be a huge cost, replacing a roof or re-painting a home certainly can be. Over your entire tenure as a homeowner, these maintenance costs will likely add up to tens of thousands of dollars.

Con 3: Fluctuations in Property Values

When you own a home, you also must account for short-term fluctuations in property value. As stated, homes generally appreciate over time. But, in the short-term, values often drop – sometimes significantly (e.g. the Great Recession). If you need to sell or refinance your home during one of these dips, you can be forced to realize a major loss.

Con 4: Large Up-front Costs

Buying a home also comes with huge up-front costs. With most conventional mortgages, borrowers must have a down payment of at least 20%. On a $300,000 house, that means you’ll need a $60,000 down payment.

But, home loans also come with closing costs, which will increase your out-of-pocket costs on the front-end of owning a home. While these costs vary, they average 3% of the loan amount. With this $240,000 loan, that means you’re looking at $7,200 in closing costs, translating to $67,200 in total up-front costs.

Con 5: Lack of Flexibility

Owning a home also inherently limits your flexibility. When you rent, you can always choose to not renew a lease if you want to move. While you can sell a house if you decide to move, it requires far more time, effort, and administrative headaches than moving out of a rental. And, if you decide to sell during a market downturn, you will also likely lose money on the sale.

Pros of Renting a Home

Pro 1: Limited Maintenance Headaches

Many of the advantages to owning a home translate to associated disadvantages to renting – and vice versa. For instance, renting a home inherently limits the maintenance headaches – and costs – you’ll face. When you need to deal with a maintenance issue as a renter, you typically just call the landlord or property manager. You normally don’t have to coordinate with and pay for your own contractor.

Pro 2: Potentially Lower Monthly Costs

Renting a home can also – potentially – translate to lower monthly costs. A lot of this will depend on the local market, your lease agreement, and whether or not you need to pay for utilities and HOA fees. But, many tenants face lower monthly housing expenses than a comparable homeowner would. However, these lower expenses don’t account for the fact that renters do not build equity – and long-term wealth – in a leased unit.

Pro 3: Location Flexibility

Many people – especially young professionals – want to live in expensive, urban neighborhoods. Buying a home in many of these neighborhoods is prohibitively expensive. This means that, if someone wants the flexibility to live in certain neighborhoods, they’ll need to rent.

Pro 4: Limited Up-front Costs

Whereas buying a home requires tens of thousands of dollars in up-front costs, renting one typically doesn’t. Even with a security deposit requirement, people can rent a home for far less in up-front costs than buying a comparable property.

Cons of Renting a Home

Con 1: No Long-term Wealth Accumulation

Without a doubt, the largest disadvantage of renting a home is that your lease payments do not build long-term wealth. When you pay rent every month, none of those dollars contribute to your net worth.

However, you can potentially offset this disadvantage by properly analyzing the local housing market. Say, for instance, you can lease a home for $1,500/month, but owning a comparable home would cost you $2,000/month. If you invest this $500 difference every month, you can somewhat offset the fact that you aren’t building equity in your home.

Con 2: Rent Payments Don’t Improve Credit Score

For some people, poor credit scores prevent homeownership. That is, they simply don’t have good enough credit to be approved for a home mortgage. Unfortunately, renting doesn’t help this reality. Currently, the major credit bureaus don’t account for rent payments in credit score calculations. This means that homeowners who already qualify for loans can further improve their credit scores by making timely mortgage payments. But, if you rent, making timely rent payments does not help improve your credit score.

Con 3: Limited Control of Rental Rates

Unless you live in a rent-controlled property, there’s little you can do when your landlord hikes rents. Yes, you can negotiate renewal terms in an original lease. But, if you fail to do this, a landlord could very well decide to massively increase rents if you choose to renew. Of course, you can move in these situations. But, if you want to stay in a property, you inherently have limited control over rental rates as a tenant.

Con 4: Limited Ability to Personalize a Space

Lastly, many lease agreements have strict clauses regarding unit modifications. That is, if you want to paint, redo a kitchen, or make any other modification, you’ll need to seek landlord approval. And, if your landlord doesn’t want any changes made, this means you have limited ability to personalize an apartment or house as a renter.

Final Thoughts

No absolute answer exists to the rent vs own question. Rather, individuals need to assess their own unique situations and the above considerations to determine what makes the most sense. Generally speaking though, if you prioritize building long-term wealth, owning a home makes sense. Conversely, if you prioritize flexibility and lifestyle, renting may be a better option.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.