Mortgage

The Reality of Renting Vs. Buying a Home

4
May

The Reality of Renting Vs. Buying a Home

Monday, May 4, 2020

When it comes to finding a place to call home, you might be hesitant to dream big. Maybe you’re inclined to owning your own place, but that seems out of reach, a dream for another day. Instead, you might focus on renting as a seemingly more affordable option.

What if I told you that there are many places right here in the Twin Cities where buying a home is actually more affordable than renting one?

There is a common misconception that owning a home is more expensive than renting, and I’m here to shine some light on the truth.

An Unfortunate Misconception

Freddie Mac surveyed both renters and homeowners in its recent Profile of Today’s Renter and Owner. The company found that an unprecedented 84% of respondents believe renting is more affordable than buying. This is up 17 percentage points from their previous 2018 survey, and is an all-time high!

Common wisdom among realtors, and mortgage advisors like me, is that no more than one-third of your monthly income should go towards rent or mortgage payments. Interestingly, according to the survey 42% of renters paid more than one-third of their income on rent, while only 24% of homeowners paid that much on their mortgage. 

Clearly this misconception is holding would-be homeowners like you back from achieving your dreams.

The Numbers Don’t Lie

How can renting a home be more expensive than owning one? One reason is because mortgage payments are static, while rental rates tend to rise over the years. Let’s look at an example to help you put this into perspective.

Let’s say you’re considering owning a home in Minneapolis (great choice!). Home values vary depending on location, even within a city, but currently an average price to purchase a home in Minneapolis is around $260,000. We’ll use this price for our example.

Once you’ve gone through the financing process, your mortgage payment is fixed at a certain rate. In this example, we’ll say you’ve arrived at a monthly mortgage payment of $1,600, which is an average mortgage payment for a home of this value in Minneapolis. This will continue to be your monthly payment until you’ve paid off your mortgage. Your yearly property tax may rise, but your mortgage payment never will. This allows you a measure of certainty in planning your future finances.

Now, let’s say you’re considering renting that same house. You may start out renting at a certain monthly rate. In this example, let’s say you move into a home with Minneapolis’ current average monthly rental payment of $1,710. This rate may be affordable for now, but there's no guarantee it will remain so. You’re subject to your landlord. If you’ve ever rented a home or apartment, you know how typical it is for your landlord to raise your rent from year to year. 

Let’s say your monthly rent payment goes up 3.4% each year. That doesn’t seem like so much, right? Compared to your fixed mortgage rate, this “small” increase can quickly add up.

Here is a table to illustrate this:

Over a seven year period living in our example house, mortgage payments are represented in yellow, while rent payments are green

As you can see, what started out as an affordable monthly rent payment can quickly rise to an unaffordable rate over a few years. If you lived in this home for seven year as a tenant, you’d end up paying $20,742 more than you would as a homeowner, while missing out on all the benefits, including the future profits, of owning that home yourself.

An Appreciation for the Finer Things

Another thing to consider is that the value of real estate increases over time due to increased demand for that property. This is called property appreciation, and it’s one of the many perks of homeownership. 

We’ve all heard that basic tenet of economics, buy low and sell high, and it definitely applies here.

Many factors of property appreciation are largely outside your control. A home’s value is influenced by location, land values, market conditions, the economy, and also its age, layout and size. This makes home ownership a mostly effortless way to make a profit. 

In most situations, owning your home is an investment in your future. Once you’ve done all the major decision-making that comes with finding a place to live, all you have to do is carefully maintain your home, while looking for opportunities to raise its value by updating its amenities. 

When you’re ready to move on, you’ll be able to turn around and sell it for a higher price than you bought it for. 

Renting Doesn’t Benefit You in the Long-Term

Alternatively, appreciation is a big factor in contributing to rising rental rates. Contrary to popular belief, most landlords aren’t evil, lurking in some dimly-lit basement office and cackling at the thought of wringing extra money from your pockets. They’re simply business owners trying to make a living themselves and stay ahead of their own rising costs.

While this is certainly understandable, it’s also far from ideal when viewed from the perspective of living as a tenant. You probably want some stability in your financial situation. When rent goes up each year, it forces you to consider moving or making sacrifices should you wish to stay in your home. 

Moving has been proven in many studies to be one of the single most stressful life events you can go through. Moving every few years due to rising rent payments takes a toll on your mental health, as well as putting considerable strain on your bank account.

Welcome to the World of Possibility

As you can see, when you rent a home, you aren’t really gaining anything beyond a temporary place to live. There is nothing to be built for your own financial future, and you’ll likely end up spending more after a few short years, as opposed to actually making a profit through home ownership. 

Why line the pockets of some landlord when you can put your money to work for you? 

Avoid all the stress of rising rent payments and frequent moving. Invest in yourself and build a pathway to financial stability you can be proud of. All the benefits of owning your own home can be yours by dreaming big, and made into your reality through solid financial planning. 

That's where I come in. If you see home ownership in your future, connect with me and let’s start your journey today!

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Monday, May 4, 2020

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