Why renting can be better than owning

Bob Mulvihill, landlord
Mulvihill Farms, Inc.
8/21/06

I'm writing this because I keep seeing advertisements and articles that tout the advantages of buying a house that don't communicate any of the disadvantages.  I like to browse borrower request listings on prosper.com and so many people are in trouble and need money because they are behind in paying their mortgage.  I feel bad for them but many of the situations are preventable.  Below are some reasons where home ownership isn't everything it's cracked up to be.   

  1. Myth: Renting is wasting your money because if you owned a house you could be deducting the mortgage interest from your taxes. 
    1. Mortgage interest and rent aren't much different. Rent is payment for use of somebody else's real estate asset, mortgage interest is payment for use of somebody else's money.
    2. If you pay $12000 per year in mortgage interest, you would lower your taxes by approximately $2400. 
    3. $2400 saved in taxes will pay your property taxes but will not be enough left over to pay for insurance ($500 and up), routine maintenance ($1000) or set aside money for large maintenance items like replacing a roof, siding, or furnace.  You also would have to set aside time to take care of the house.
    4. If you paid $1000 per month in rent, you wouldn't be able to deduct rent from your taxes however you would be ahead by not paying property taxes, property insurance (you would have renters insurance but that is only $150 per year) nor pay for maintenance items that your landlord would fix. 
  2. Reality: Buying a house is just the beginning of expenses.
    1. You save to afford a downpayment and then buy a house.  Now you have to buy appliances, furniture, tools, lawnmower, and set aside money for redecorating. 
    2. Your monthly costs will increase.
      1. To pay for the mortgage that is usually higher than rent.
      2. Higher utility costs that come from the larger amount of square footage.
      3. Pay for the insurance, maintainance and property tax expenses.
  3. Myth: Buying a house is the best investment you'll make.
    1. Houses appreciate 3% to 5% a year on average. If you put $10,000 down on a $100,000 house and next year the house is worth $105,000, you have made $5000 on your $10,000 investment on paper. 
    2. However, it would cost you approximately $10,500 to sell a $105,000 house when paying a realtor commision, other selling fees, and prorated taxes.  
    3. You would lose $5500 of your initial $10,000 downpayment after you pay back the $90,000 mortgage on proceeds of $94,500 after selling expenses.
    4. If you owned that same house for 3 years, sold the house for $115,000, your $10,000 is now $14,000 ($115,000 - $11,500 selling cost - $90,000 mortgage).  Add to that number what you saved on taxes but then subtract what you spent for maintenance, insurance and taxes for those 3 years. 
    5. If instead you would have continued renting and put $300 extra per month into an index fund that you would have by not buying a house, you would have at least $11,000 at the end of 3 years which you could add to the $10,000 you had in savings that you could have bought a house with.  Thus after three years you would have over $20,000 in savings by renting and saving your money compared to $10,000 to $14,000 by buying and selling a house.
    6. Keep in mind this is a normal scenario for buying and selling a house.  Home prices don't appreciate in value every year.  Asset values can drop overnight but debt will stay with you until it's paid off. 
  4. When does buying a house make sense?
    1. When you can put at least 20% down.
    2. When you can put enough money down so that you can work at a fast food restaurant and still pay the mortgage or can pay all expenses with one income with money leftover.  Job situations can change unexpectedly.
    3. You are ready to live somewhere for more than 5 years.
    4. You have a nest egg saved up and invested that is not needed for a house downpayment. 

    I bought the house my wife and I live in when I was 25 years old and single. I put a little over 20% down so that I wouldn't have to pay PMI.  The lender was little nervous because I had no credit; no credit cards, car payment or anything.  My mortgage was $543 per month which I figured I could easily pay if I had to take a lesser job.  I wasn't looking to buy a house but the opportunity arose where I could buy a house that had been in the family in an area I wanted to live in.  I don't regret buying a house but I remember how I went from feeling rich before I bought the house to not having much left over.  I have owned the house for almost 11 years now. I'm not sure what our house is worth now, it's worth at least 50% more than what I paid for it. However, even assuming my house is worth 100% more, I would be better off financially if I had put the same amount of money into the S&P 500 which has returned 14.5% annually during the same time period. Home ownership is great as far as it improves your standard of living but I don't recommend viewing it as a way to get rich.