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Owning or Renting a Home: Which is the Worst Financially?

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Renting a home vs. Owning; how do you know what's best for you financially? Is it better to spend your savings on home ownership or use the money for rent?

When Prudence of PrudenceDebtFree spoke to her neighbor about owning a home, he was emphatic that people shouldn’t own homes because in his opinion, owning a home opens the door to a “lifestyle.”

Prudence’s neighbor didn’t mean “lifestyle” in a positive way, either. He believes that homeowners are more tempted to take out loans on their house to do renovations. They’re more likely to spend money on “unnecessary services,” like landscaping. They’re even more likely to be in debt in old age.

On the other side of the coin, I recently had an elderly relative tell me that renting a home is a huge waste of money. He seemed very disappointed that I was “throwing away” my $1,875 every month on my rent when I should be using it to build equity in something all my own. It was strange to him that two people our age with two children were still renters.

owning vs. Renting a home -What’s the Worst Advice?

 

As some of you know, I’ve been documenting the worst financial advice around the blogosphere over the past few months here on Frugal Rules. When I think about home ownership and the advice that surrounds that decision, I find it really comes down to the individual, their own aspirations for their life, and their financial situation.

What may be terrible advice to give one person may be perfect for another. I’ve also learned that while it’s easy to make blanket statements about renting vs. owning a home, it’s hard to make everyone fit into those statements. So what advice can you trust to help you draw the conclusion that’s right for you? Here’s my two cents on how to decide whether you should rent or own.

Do Your Research

 

Ultimately, home ownership is a very serious decision, and each and every person should do their own research. They shouldn’t watch HGTV shows dreaming about the color of their granite. They shouldn’t drive through neighborhoods looking at houses they can’t afford. They shouldn’t go to open houses and fall in love with something before they have a grasp of their financial situation.

As J$ recently illustrated, sometimes renting is cheaper than owning a home on a year to year basis. Sometimes it’s also less of a headache, and emotional tolls are certainly worth considering.

My Home Ownership Goals

 

Home ownership is far away for me, so far it’s hardly worth thinking about. If I stay in New Jersey where I live now, it’s going to be a very, very long time before I can even afford a home. Just a small home in my city runs about $500,000.

Renting a home vs. Owning; how do you know what's best for you financially? Is it better to spend your savings on home ownership or use the money for rent?

However, there are lots of opportunities for real estate investment in this area and in Manhattan, which is about 30 minutes away from me. I can see myself purchasing a tiny studio to rent out to a tenant in Manhattan one day while still renting a larger house for myself out in the suburbs.

Only time will tell, but I know that for me personally, the advice to buy a home and stop wasting my money on rent is terrible advice. It would ruin us financially and we’re not nearly to a place professionally where we can handle it. For others, though, it might make sense, and to them I say go for it if you can afford it.

 

What is some bad advice you’ve heard when it comes to home ownership vs. renting? What’s your take? Are you renting or owning and why?

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Catherine Alford is a professional public speaker and freelance writer who covers family, finance, and freedom. Check out her blog, BudgetBlonde, and her bio at CatherineAlford.com.

29 Comments

  • Miriam says:

    Good article Cat. I totallly agree with you.

    The rest of this comment is for John. I don’t know if you have control over what shows up in the email but I find that I often wonder who wrote an article when I’m reading it because it doesn’t match what I know about you. I realize I can click further to the web and find the author but sometimes I would prefer not to have to do that. Just a though – make sure the author is clearly indicated at the top.

    • John Schmoll says:

      Thanks for the feedback Miriam, I appreciate it. I can see how that might be frustrating…I’m not certain if it can be fixed or not, but I’ll definitely check in with my email provider to see if that’s something that can be changed. 🙂

    • Cat says:

      Thanks Mariam! Yeah you can bet if it’s about twins, student loan debt, or not owning a home, it’s not John haha. Thanks for reading!

  • Kalie says:

    The idea that renting is always wasting money is such a myth. There are so many hidden costs associated with owning a home that don’t show up on the online mortgage calculators. Also, the idea that home ownership is a great investment is often not true. While buying and selling real estate may be an investment, the upkeep, taxes, furnishings and other costs that come with living in a home cut way into any increase home value. And in some areas the market is just flat and has been for some time. So unless you’re going to stick it out for the long haul in those areas and pay off your loan fast before paying tons of interest, it’s not really an investment. It’s just a home.

  • Kathy says:

    Either way of paying for shelter is good depending on what a person wants or can afford. In my city, single family homes for rent are few and the ones out there usually aren’t of the best quality. However, if your income isn’t such that allows you to save for a down payment, or if you think you are going to move soon or frequently then renting is certainly a viable option. Owning creates a whole set of issues you need to deal with such as maintenance, real estate taxes, and property insurance (which is far higher than renter’s insurance). You can lock in your mortgage payment, which isn’t the case with rent, but taxes and insurance always go up which is probably why rents go up as well. The owner has to get the money somewhere.

  • Like anything else there are pros and cons to both. When I lived in Seattle I was just about ready to start searching for a condo when we heard we would either be laid off or relocated to LA. Well living in LA is a totally different ballpark (like Jersey or NY), and throw on top of that being a freelancer, it does not make any sense (nor is it possible right now) to own. Even my very well off friends struggled to find a place because of the bidding wars around here.

  • It’s true that it does boil down to the individual and there are pros and cons to both. Some people have no interest in maintaining a home and renting is perfect for them. I prefer to own and that’s why I bought my first place at 21 which has ultimately helped us to become debt free including our mortgage today. My wife bought her first home around the age of 29 or 30 then sold it for a nice profit. That worked for us but maybe not for others.

  • I can see that here in Montreal (and I’d say in Canada in general), there is a certain “social pressure” to own a home. Nobody seems to agree with me that it’s ok to not buy a home at all and live renting — it depends on your financial situation.
    If you don’t own a home you are not successful, you are not doing well, you know nothing about anything and you are ugly 🙂

  • Mrs. Maroon says:

    Living in the suburbs of cities in Texas, and now Oklahoma, has made purchasing a home the best option for us and almost everyone else we know. The rental market is not as favorable as in other parts of the country. We also have lived in newer homes, so maintenance and renovations have been kept to a minimum. Adding to the decision process is the area where you live – after all the key phrase in real estate is Location, Location, Location.

  • When I hear someone say, “You’re throwing money away by renting” I know I’ve met a person who’s bought into the mortgage industry’s mantra and hasn’t done any math. Real estate? Yes, please. Home ownership? …maybe not so much.

  • Elroy says:

    Worst advice I’ve heard is […] renting is throwing money away.

  • I agree, Cat: you guys are smart to rent right now. I used to believe very strongly in home ownership, like your elderly relative does, but I’ve learned that it’s just not right for everyone. My mom/stepdad are selling their home and going to rent a 55+ living apartment. It’s the perfect option for them for a number of reasons.

  • I am actually a big proponent of renting vs. owning, especially if you work through the numbers, between home repairs, realtor costs, taxes, etc. there are a lot of financial traps to home ownership, and if you don’t plan to stay in the home for a period of time, you could end up losing more than you think you are gaining.

  • I didn’t find a good and reliable co-signer. All else seemed to fail. And I just regret finding someone with a strong credit history and verifiable income who is more willing to co-sign the lease agreement on my behalf. 🙁

  • I totally agree with you that buying shouldn’t be considered the default “correct” answer. There are so many factors to take into account and it just doesn’t make sense to buy in every market for every person. Gone are the days when a home is seen as the best and primary investment.

    We do own our home, but we bought it primarily because it was a good deal and has great rental potential. The bonus is that we enjoy living in it too :)!

  • I am surprised that someone thought you should own something already… you’re still very mobile and don’t know where you will land!
    The correct answer absolutely depends on the person and the situation!

  • I like owning a home, but it’s cheap to do so where we live. If we were in an expensive area, renting would make more sense. I do have a little envy of our tenants who can just call up if their sink is clogged!

  • Rachel says:

    So where I live is a college town and highly desirable area to live. Also in 2013 there was flooding statewide, meaning it has very much changed the rental market. Rentals have waiting lists and are more expensive by about 30% or our mortgage. Affordable housing is few and far between. Housing authorities have wait lists that are a year plus. So for us we bought a condo with a yard close to campus. It was the only area with the yard for that price. We only put 5% down. Even with paying PMI and interest we pay 30% less on our mortgage then renting. We have a low interest rate and the condo would rent very easily when we choose to move. Yea homeowner ship can be expensive, our fridge died and we had to replace it. in the long run, its the difference of 2 months of rent. So renting would have easily been over $12000 per year and not so easy with our pets. Our mortgage, taxes, PMI and insurance is less then $9000 Per year. So even with our few improvements we plan to make each year, we still come out ahead. As well we have gained some equity in our home. So we may not get back all of interest but at least we get something back. So I think it all depends on price of homes, availability of rentals, how affordable renting is vs. Owning and knowing what to expect with where you live.

  • All depends on the city. East Coast / West Coast renting seems to be better if you’re near a major metro. Midwest / South the math works in favor of buying more often than not.

    The mortgage / taxes / insurance for our 2300 sq. foot house in Houston is probably 300-600 less than a nice apartment near my office. We’re slightly further away, but get much better value. Plus we added a room mate who pays a large chunk of that.

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