Rent vs. Buy – Who Really Wins?
Wednesday, September 15, 2004
Renting is wonderful, wouldn’t you agree? The landlord mows the lawn or hires a gardener and fixes anything that breaks. Stove stops working. Call the landlord. Refrigerator dies. Call the landlord. Water heater explodes and floods the place, grab a towel and call the landlord. Aside from your security deposit, you don’t have much of a financial stake in the place you call home. What more could you ask for?
Well, as a tenant, you also have specific rights that protect you from unfair eviction, even if you haven’t paid your rent in months. In some states, it is illegal for a landlord to evict a non paying tenant during the cold winter months. I know. It happened to me.
A tenant is restricted only by the terms of the lease or rental agreement as it is written. If it’s not in the contract, they aren’t responsible. So what else is that money you’re spending every month getting you? Not much. Every month you write a check to your landlord it’s mostly for the privilege of living there and not much else. Since everyone needs a place to live though, that’s clearly money well spent, right?
Some others, homeowners and landlords mainly, would beg to differ. In fact, most believe renters are open checkbooks to finance their real estate empires. They think, “Why rent when you obviously should buy?” Well, in the San Diego market perhaps that is easier said than done if you aren’t a venture capitalist, but all over the nation, people are making real fortunes in real estate. Down payments aside, if you can buy an $80,000 home for $500 a month in Arizona and be building equity, why spend that same $500 to buy someone else’s home for them?
Many argue that buying a home is impossible for their current income level. They would need to win the lottery to even afford a down payment. Everything is too expensive and it seems unrealistic to save up 20% of the price of a home. By the time they did, housing prices would have risen or they might be dead. Ok, I don’t know about you guys, but with the median housing price in San Diego being almost $500,000, I might be inclined to agree, but I know better.
Traditions are what people follow when they don’t know any better, so the industry bucked tradition and thought ahead, changing dramatically over the last 20 years with the creation and adoption of what is often referred to as “creative financing.” Today, people who may have never dreamed they could qualify for a traditional home loan are finding there are many programs available to first time buyers, military veterans, and even single mothers, that make the American dream of home ownership a viable reality.
When California became a state in 1850, much of its historical land ownership was preserved. All land owners were recognized and deeds of ownership began to be publicly recorded. Less than 100 years ago, homes and property were still primarily sold at auction like any other item, cash only, with payment due in full. As prices increased and fewer people were able to purchase homes with cash, a clear need for a form of financing, happily provided by interest charging banks, became the norm for buying a property. The bank would provide the total sum to the seller of the property in exchange for the buyer signing a note promising to repay the sum to the bank over a term, usually 30 years, while the buyer gained title and the bank retained ownership of the deed. This provided protection for the bank’s investment and legal right of use for the homeowner throughout their ownership of the property.
History lessons aside, what are some of the current day practical reasons to own a home? In my opinion, one of the greatest reasons to own a home is that you are building equity, albeit slowly at first, when you write that check every month. Even better, you have the opportunity to watch your home grow in value as you customize and care for it. In the last five years, on average, San Diego homes have doubled or tripled in value. If you’re talking about a $150,000 home in 1999 that now’s now worth $300,000 to $400,000 or more, that’s a lot of money in the bank.
A house payment is composed of two parts, interest and principal. If you look at how much a bank will make over the term of a typical loan, you understand why they love it when people buy homes. Let’s say you have a $300,000 loan at 7.5%. Your monthly payment will be approximately $2,000, with $300 of that being applied to the principal and the rest being interest on the loan. Over 30 years, the bank will make over $425,000 in interest alone. Holy cow!
The US government recognizes this interest, however, as tax deductible against your annual income. If the average interest is $1,700 times 12 months, you’re able to write off over $20,000 against your income. This means that if you made $50,000 last year, your *taxable* income is less than $30,000, saving you money in taxes. If you had been paying the same $2000 in rent, which is not unrealistic here in San Diego County, what tax benefit would you get? Nothing, *and* you’d still have to pay taxes at your $50,000 income level! How unfair is that?
Speaking of tax benefits, you can also borrow against the equity in your home. If you have $50,000 worth of equity in your home and take out an 80% loan for $40,000, there are currently no restrictions on what you can do with the money. You could put in a pool, send a child to college, add a bedroom or a bathroom to increase the value of your home, or even purchase your next car! No matter what you buy, you’ll able to write off the loan interest as tax deductible; something you can’t do with credit cards or car loans.
Another thing you usually can’t have when renting is pets. How many of you have pets? I have two cats and three dogs. There isn’t a landlord I know who would rent to me. *I* wouldn’t rent to me if I was my own landlord! Animals have proven no more destructive than creative children, but far more negative experiences with animals over the years have led landlords to restrict or even refuse to allow pets on the premises of their properties. When they do, there are usually size limitations, like 20lb dogs. What is that? I think my cat weighs 20 lbs!
So you tell the landlord that you don’t have a pet and sneak one in anyway. Easy enough, right? Well, not such a great idea because the landlord has a key and can come with as little as 24 hours notice, which includes leaving a message on an answering machine. When renting, you lack much of the privacy and security you expect as a homeowner. I had a friend who once caught her landlord going through her clothing! When you own a home, you can change the locks if you feel your security has been compromised. You can also, paint the walls, tile the floors, or make any customizations you want, all things you can’t do when renting.
As a homeowner, if you have a fixed rate loan, there is never a worry about whether the rent is going up the next year. You also don’t have to worry about being evicted when the landlord suddenly decides to sell the place or let their Aunt Betty move in because she needs a place to stay. When renting, you are at the absolute mercy of your landlord. Being one, I can tell you, we really don’t lose any sleep over it, as long as the solution is fair, legal, works to our benefit, and gets the bills paid.
While being a good tenant and paying your rent on time can help you build credit references, when it comes to lending institutions, there is no more respected item on your individual credit report than a home loan. Although credit ratings are a complex blending of your previous credit use, income level, and spending habits, nothing says responsibility more than a home loan.
In the world we live in where the ability to gain, and maintain credit is imperative to financial survival, you can do yourself no better favor than to bolster your credit rating through home ownership. Add to the mix all the other benefits I have mentioned and homeownership seems like less of a dream and more of a necessity.
Well, as a tenant, you also have specific rights that protect you from unfair eviction, even if you haven’t paid your rent in months. In some states, it is illegal for a landlord to evict a non paying tenant during the cold winter months. I know. It happened to me.
A tenant is restricted only by the terms of the lease or rental agreement as it is written. If it’s not in the contract, they aren’t responsible. So what else is that money you’re spending every month getting you? Not much. Every month you write a check to your landlord it’s mostly for the privilege of living there and not much else. Since everyone needs a place to live though, that’s clearly money well spent, right?
Some others, homeowners and landlords mainly, would beg to differ. In fact, most believe renters are open checkbooks to finance their real estate empires. They think, “Why rent when you obviously should buy?” Well, in the San Diego market perhaps that is easier said than done if you aren’t a venture capitalist, but all over the nation, people are making real fortunes in real estate. Down payments aside, if you can buy an $80,000 home for $500 a month in Arizona and be building equity, why spend that same $500 to buy someone else’s home for them?
Many argue that buying a home is impossible for their current income level. They would need to win the lottery to even afford a down payment. Everything is too expensive and it seems unrealistic to save up 20% of the price of a home. By the time they did, housing prices would have risen or they might be dead. Ok, I don’t know about you guys, but with the median housing price in San Diego being almost $500,000, I might be inclined to agree, but I know better.
Traditions are what people follow when they don’t know any better, so the industry bucked tradition and thought ahead, changing dramatically over the last 20 years with the creation and adoption of what is often referred to as “creative financing.” Today, people who may have never dreamed they could qualify for a traditional home loan are finding there are many programs available to first time buyers, military veterans, and even single mothers, that make the American dream of home ownership a viable reality.
When California became a state in 1850, much of its historical land ownership was preserved. All land owners were recognized and deeds of ownership began to be publicly recorded. Less than 100 years ago, homes and property were still primarily sold at auction like any other item, cash only, with payment due in full. As prices increased and fewer people were able to purchase homes with cash, a clear need for a form of financing, happily provided by interest charging banks, became the norm for buying a property. The bank would provide the total sum to the seller of the property in exchange for the buyer signing a note promising to repay the sum to the bank over a term, usually 30 years, while the buyer gained title and the bank retained ownership of the deed. This provided protection for the bank’s investment and legal right of use for the homeowner throughout their ownership of the property.
History lessons aside, what are some of the current day practical reasons to own a home? In my opinion, one of the greatest reasons to own a home is that you are building equity, albeit slowly at first, when you write that check every month. Even better, you have the opportunity to watch your home grow in value as you customize and care for it. In the last five years, on average, San Diego homes have doubled or tripled in value. If you’re talking about a $150,000 home in 1999 that now’s now worth $300,000 to $400,000 or more, that’s a lot of money in the bank.
A house payment is composed of two parts, interest and principal. If you look at how much a bank will make over the term of a typical loan, you understand why they love it when people buy homes. Let’s say you have a $300,000 loan at 7.5%. Your monthly payment will be approximately $2,000, with $300 of that being applied to the principal and the rest being interest on the loan. Over 30 years, the bank will make over $425,000 in interest alone. Holy cow!
The US government recognizes this interest, however, as tax deductible against your annual income. If the average interest is $1,700 times 12 months, you’re able to write off over $20,000 against your income. This means that if you made $50,000 last year, your *taxable* income is less than $30,000, saving you money in taxes. If you had been paying the same $2000 in rent, which is not unrealistic here in San Diego County, what tax benefit would you get? Nothing, *and* you’d still have to pay taxes at your $50,000 income level! How unfair is that?
Speaking of tax benefits, you can also borrow against the equity in your home. If you have $50,000 worth of equity in your home and take out an 80% loan for $40,000, there are currently no restrictions on what you can do with the money. You could put in a pool, send a child to college, add a bedroom or a bathroom to increase the value of your home, or even purchase your next car! No matter what you buy, you’ll able to write off the loan interest as tax deductible; something you can’t do with credit cards or car loans.
Another thing you usually can’t have when renting is pets. How many of you have pets? I have two cats and three dogs. There isn’t a landlord I know who would rent to me. *I* wouldn’t rent to me if I was my own landlord! Animals have proven no more destructive than creative children, but far more negative experiences with animals over the years have led landlords to restrict or even refuse to allow pets on the premises of their properties. When they do, there are usually size limitations, like 20lb dogs. What is that? I think my cat weighs 20 lbs!
So you tell the landlord that you don’t have a pet and sneak one in anyway. Easy enough, right? Well, not such a great idea because the landlord has a key and can come with as little as 24 hours notice, which includes leaving a message on an answering machine. When renting, you lack much of the privacy and security you expect as a homeowner. I had a friend who once caught her landlord going through her clothing! When you own a home, you can change the locks if you feel your security has been compromised. You can also, paint the walls, tile the floors, or make any customizations you want, all things you can’t do when renting.
As a homeowner, if you have a fixed rate loan, there is never a worry about whether the rent is going up the next year. You also don’t have to worry about being evicted when the landlord suddenly decides to sell the place or let their Aunt Betty move in because she needs a place to stay. When renting, you are at the absolute mercy of your landlord. Being one, I can tell you, we really don’t lose any sleep over it, as long as the solution is fair, legal, works to our benefit, and gets the bills paid.
While being a good tenant and paying your rent on time can help you build credit references, when it comes to lending institutions, there is no more respected item on your individual credit report than a home loan. Although credit ratings are a complex blending of your previous credit use, income level, and spending habits, nothing says responsibility more than a home loan.
In the world we live in where the ability to gain, and maintain credit is imperative to financial survival, you can do yourself no better favor than to bolster your credit rating through home ownership. Add to the mix all the other benefits I have mentioned and homeownership seems like less of a dream and more of a necessity.
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