I got my inspiration for this post by reading an article online titled “Don’t Pity the Rentennials: Why Not Owning a Home Is a Good Thing.” Over the last few years, I have thought about this question a lot, but it was until my last apartment that I realized the hidden benefits of renting.
My previous apartment in Jersey City, NJ, was the owner’s duplex unit in a gorgeous brownstone. It had a back yard, a basement for storage, and was super spacious. In short, it was a great place to live in and I loved it… until things started to go haywire. We were renting from a landlord that lived out of the country (mistake #1), so any work that needed to be done had to be organized by and paid for by us, the tenants. The owner’s unit is the bottom two floors of the building, so at the end of the rainy season, the rain came down in sheets and the basement filled up like a giant sludge filled bath tub, where I was storing stuff (mistake #2). Fire alarms were going off because things were leaking onto the smoke detector, sump pumps weren’t pumping out into the street, but instead were pressurizing the sewage outlet pipe… making sewage come out from the bottom of the sinks/bath tub in the main floor. It was a nightmare.
It was then that I realized that as a renter, I did not need to deal with these kinds of things.
Renting: You Pay For What You Get
Renting an apartment is like renting a car. You pay the person at the counter, open up the car, get in, turn the key and expect it to just work. You don’t care if you get into an accident, if the engine stops running, if it overheats – whatever. Car rental places give you something that works, is dependable, and is filled with gas when you get it, and you are expected to return it in a similarly respectable fashion. It is the responsibility of the owner of an apartment to provide the renter with the same type of service. If the dishwasher breaks, the owner is obliged to fix it on the behalf of the tenant. If the sinks clog, the owner is expected to foot the bill for the plumber.
A big downside to renting is not being able to customize your living space. Since you don’t own it, why would you pay to improve someone else’s equity?
People sometimes say that you don’t get anything at the end of a lease, but I would argue that your money went towards peace of mind and not having to deal with the drudgery that goes along with owning a home. On top of that, as was mentioned in the article above, renting offers the flexibility of being unattached from that property just in case a new job opportunity in a different city or country pops up.
Owning: The Good With The Bad
Let’s begin with opportunity cost: That massive down payment is converted into equity in the home that is purchased and is at risk with the fluctuation of the value of the home. It’s a strange kind of equity, though, because you borrow for the remaining amount. This is called leverage. For example, you have $100 and you have a $100 stock vs. a house that costs $1,000. If you buy the stock for $100 and the price goes up to by 10% to $110, you have made $10. If you buy the house for $100 with a $900 loan and the value of the home goes up 10%, you have made $100 – in other words, you have doubled your money. The magnification of returns is also true for if the value of the house goes down: if the price falls to $900, you’ve wiped away all of your equity. Leverage makes the opportunity cost – or relative performance of one investment vehicle vs. another, in this case stock vs. a home – a very wide risk differential. That $100 dollars could have been invested in a less risky asset and you could have kept, say, $70, instead of all of your $100 being wiped away. This is opportunity cost!
Another bad thing is transaction cost: to buy a house, there are middlemen/women that need to be compensated. Taxes, application fees, registration costs, lawyer fees, broker fees… the list goes on. You could have started with $100, but a good proportion of that will go to the 5% commission to the broker, leaving you only with $50 to actually use for a down payment, and that’s even without the change in value of the home! In short, if you start off having a 10% of the sale price, you are instantly taking a 50% loss just to pay the broker. From a leverage minimization and equity conservation perspective, it is always better to put more money down.
It isn’t all bad, though. The mortgage interest tax deductions are great. Part of every mortgage payment is conserved in the form of equity (like a different kind of savings or brokerage account), so if you are renting the property, you are gaining equity off of someone else’s money! This can be an extremely powerful concept and many people have – and are – making loads of money/equity by taking advantage of the combination of conservative investments mixed with tax benefits.
So Which Is Better?
Like many things, the advantage depends on the use case and geography. If you have a fairly static life situation, home ownership may be a smart investment. More dynamic life variables point to using alternative investment vehicles in order to grow equity. Remember, there is no guarantee that home values will always continue to increase in any given time frame. A home is like any other investment, you take existing cash and convert it into something. That something may itself grow in value, or it may provide you with steady cash flows in the future. The real key is maximizing your own payout graph.
As for me, I am pretty sure I will continue to rent, unless I find an opportunity to invest in something that I know I will want to keep for a long time. I’m still young, so who knows what kinds of things my career will bring, and the last thing I’d like to do is to put a big chunk of my hard earned money in a broker’s hands if I didn’t think their service was worth my investment.