Good morning. Hope everyone had a fantastic weekend. I thoroughly enjoyed mine. Played some softball Friday night (go figure) then got to a be a bum (do nothing) for Saturday followed by going to my friend Rachel’s 40th birthday party at another friend’s house. Topped off by Sunday with some more softball, football watching, and having dinner with my mom, Bill, Kristi and Ayden. All in all pretty enjoyable weekend with great weather.
Suddenly, Monday morning reared it’s leering head and I had to exit the warm, cozy bed to go play in traffic. Boo.
On the way into work, I do my usual mental checklist of things I need to do. Pay my credit card bill, stop by the store for milk, balance my virtual ‘checkbook’, clean the litter box, pay the rent, etc. This routine progression got me to thinking about the whole rent versus buying argument. Over the years I cannot remember how many times I have heard, “If you are renting you are throwing your money away, put your money into buying a house (home)”. To a certain degree the point is valid, however, I have always seen renting as a convenience and in some circumstances a smarter move. How can I feel that way? Let me state my case and you can see where I am coming from.
So let’s have a baseline starting point. Let’s say a rent payment is $715 per month (steep for rent yes) but that equates out to mortgage payment on a $150,000 house (based on $150,000 principal financed over 30 years at 4% fixed interest rate). Actually the mortgage would be $716.12 based on these components but for argument sake we will keep it the same. I have attached a sample amortization table for the mortgage. The monthly payment is $716.12 of which the first payment contains $500.00 in interest and $216.12 in principal. So if you went from October 2015 through October 2017 (25 payments) and you paid the rent side you would pay out $17,875.00. Over the same period for the mortgage you would pay $17,903.00 – of which you would have paid $5624.81 in principal and $12,278.25 in interest. The investment-minded people would be like – hey, I have $5624.81 towards my home. In the philosophy of: The journey of a thousand miles begins with the first step, OK. Let me take the macro down to the micro and see where this goes.
— Spreadsheet of Amortization Table —
Twenty-five payments into a place is just over two years. Think back over the last two years of your life. Alot has transpired in that time-frame. Now focus just on your living space. Have you had to cut grass or trim any bushes or rake leaves? Did the water-heater stop working? Did the roof leak? Do you have a pool? Did the room color in the living room annoy you so much you wanted to change it? Hmmm?
Living somewhere is not all about paying a fee to store your things and sleep there. A home (either rented or owned) is about managing the environment. Some people live minimally and just have furniture and hang a few pictures so the wall colors and room configurations are generally not a big deal so renting may make sense. But some people need to gut a place and change things to meet their interpretation of what they expect from a home. I guess you just need to ask yourself are you high or low maintenance? lol
If you are integrating with your home, fixing this and painting that and installing such – then you should probably own your home and the financial side is really kind of moot. But if you really are more of a hang and go kind of person you probably are more programmed for the renter’s mentality. Nest in the space and dress it up to reflect your style but essentially leave it unchanged and maintenance free.
To take a more logical approach to my pro-renter argument point of view I will try to stay on the financial costs of each. Let’s take two hypothetical identical places. One is renting a place and the other is buying through a mortgage. Let’s also say both parties have virtually the same fiscal means, very little money in savings but a steady bi-weekly income or as steady as can be in these volatile economic times. The renter and the home buyer have the same appliances, a furnace, a water-heater, front and back yard, two-car garage and a basement. For the renter, he/she is limited in how much can be done from a decorating or modifying avenue of the walls, landscaping, etc. The home buyer can do any of those things – with an out of pocket cost of course but freedom to do as they please. Typically (but not always) the renter will not have to pay for someone to cut the grass or maintain trimming the bushes – where the home buyer will have to pay someone to do these things or invest in the tools necessary to do themselves plus the time associated with each task. Now for the unexpected, say the water heater or furnace breaks down. The renter calls the leasing office to have these items serviced (free of charge) and the home buyer who has limited resources is forced to pay for these things out of pocket or put on a credit card or borrow from loan sharks. Potentially hundreds of dollars for a plumber, electrician or other contractor to try to diagnose what may be wrong and not always done right the first time.
So the home buyer has the exposure for greater out of pocket expense whether by choice (decorating, remodeling, etc.) or just by Murphy’s Law. So going back to the baseline of $150,000 value for the home being purchase; after 25 payments each – the renter can leave and find a new place if the leasing contract is up – giving them some flexibility with a shorter term obligation. The home buyer is on the hook a bit more as they still have twenty-eight (28) years they have agreed to pay the bank for their home. Obviously they can sell their home and move but that has its pitfalls as well. Say the economy takes a dip and housing values also take a dip. The $150K home could now only be valued at $145,000 and your potential buyer might only be willing to pay that amount because their loan is contingent upon the appraised value. Also let’s say during the 25 months the home buyer has been in the home and spent $10,000 to upgrade the bathroom but the appraisal still is at the $145,000 level. The home buyer has $160,000 invested in the home between the upgrade and the purchase price – with only $5600 in equity to show for it. Now the home buyer is in the hole heading into their prospective new home purchase.
Now the whole conversation can become null and void if the home buyer can flop down the entire purchase price out of pocket. Then owning your own home is obviously a different conversation but if you have those kind of resources then you have more options. But for the argument at hand I am putting the proviso out that people who are not financially self sufficient, typically renting makes sense as a convenience and the ‘wasted’ money in rent can be rationalized.
This is just my take on the whole rent versus buy thing. Now if I hit the Powerball lottery I could jump on that home buyer track in a hurry but for now I am pro-renting.
And as an epilogue for those saying, well if you owned a home you would feel differently. Hold on there Buster or Bustette. I have been on both sides of this fence. I owned a home for 12 years and have rented for about 10 years as well. I liked the freedom to call my own shots with my home I was buying but also the maintenance was rough and in the end did not financially pan out (even with the interest being tax deductible). On the renting side I have been pretty lucky to have decent landlords (good research I suppose) but you kind of feel a bit like a house sitter instead of the lord and master. It’s a trade-off I suppose.
Hope everyone has a spiffy if not downright awesome Monday.