What if I told you that renting was for the rich? Would you believe this idea? With an expendable income and the need or will to move on at a moment’s notice, rentals are made for the wealthy. But what if I went further to tell you, that buying was for the individual of modest means? What I’m proposing is that the accumulation of long term wealth is most necessary for those with the least expendable income, or modest means.
Of course anyone can have their own opinion on this. Read this and form you own. Here it is: The facts of Renting Vs. Buying!
Although the practice of parents buying an investment condo for their son or daughter while away at school is becoming more frequent, most students still rent at some point. Renting and then buying in that order is rooted in our idea of how things work almost as much as getting older itself. For the next 640 words let’s accept the challenge to break the concept that renting is for the young and buying is for the old.
Renting Facts:
Rentals provide low commitment. For a couple thousand a month you don’t have to mow a lawn, pay for light bulbs, or worry very much when your fraternity brother spills his beer. This may be the main reason many young folks rent.
Rentals provide no equity. The first four days of the month with a one-day grace period, of course, are the days’ landlords love and tenants hate. Each month you give away typically 20-45% of your income, never seeing that money again. One could argue that it will eventually go to increase the parking in the complex, but we all know it never will.
Note -- Do you know what your rent really pays for? Here is the typical break down:
- A portion goes to property upkeep,
- A percent to the property manager (if there is one),
- Some gets set aside for capital expenditures (ex. your HVAC goes out, so they now have budgeted funds to fix it),
- A small amount, called cash flow goes into the owner’s pocket, and finally
- A large amount goes into paying down the owner’s loan! (Loan equals the owners mortgage. So you are still paying a mortgage, sorry.)
Owning Facts:
Owning requires a semi large commitment. The truth about buying a home is that you can sell it. We will talk a little about risk in a moment, but for the most part as long as you can get some kind of down payment together, sometimes as low as 3.5%, then you can do it. You need to commit to the upkeep of the property when you buy, sure, but look at it as protecting your investment.
Owning requires yard work…and upkeep. Don’t like yard work? Buy a condo with no yard. Yes, mowing the grass can really stink. Calling a contractor to fix a leak can really suck. However, maybe it will be worth it to have a well maintained property that is entirely your own.
Owning provides equity. Every single month you own more and more of your home. That means whether you pay at the start of the month or the end (Advance or Arrears) you own more and more of your home each month. Ownership can be sold, for a profit!
Analysis:
So Risk… yeah buying is risky. What if the market tanks before I want to sell? What if my house gets a leak, or two? Yeah there is risk and as Realtor I am here to tell you there is unseen risk. You must be careful! However, with risk there is reward. Also, let me introduce you to insurance, a method to mitigate some risk.
Let us talk rent vs. mortgage really quick. As we said with rent, typically you pay down the owner’s mortgage and then some. So, what if you payed your own mortgage and then some for repairs and unseen expenses? Hmmm, interesting thought. To clarify, you can pay $1,400 a month for rent. (Thinking in terms of average Nashville student rent) Or you could pay $1,256.32 (principle and interest of a 30- year fixed loan at 3.5%) and then add a little to that pot and pretend to pay that $1,400 a month just so we have money budgeted for repairs.
Jeez! You are then paying the same amount whether you rent or own, expect for one major difference. If I sell, I get that money back. When my lease ends, I get a small security deposit check.
The only real adult thing about owning is that it can be hard to rap your mind around it. With so many requirements to maintain property, renting can seem easy. However, I challenge you to think outside the box. Take initiative. Take ownership. Seek guidance. Many professionals myself included would love to sit down and chat with you about Renting vs. Owning.
It comes down to this: the money you pay towards your rent you will never see again, the money you pay towards a mortgage and down payment, you may very well see at a closing table years later.
