For generations, few things may have been as essential to the American Dream as home ownership. Even today, home ownership may still be an indication of success given that more homeowners are college-educated, and tend to be more affluent, compared to individuals who rent.1 However, the face of American home ownership is changing with the average age of new homeowners increasing, and Baby Boomers pouring into the rental market.2 So given these changing trends, which is right for you, buying or renting?
You Can Build Equity with a Mortgage
One of the reasons people think owning a home is more advantageous than renting is because the principal payments you make on the mortgage is money you will theoretically “get back” if and when you choose to sell the home in the future.
When making payments on your loan, you are building equity which is the value in the home that you actually own. Ideally, your equity will increase over time either by paying off the principal on the loan, through price appreciation of the home, or both. If a time comes when you wish to sell the home, you can use the equity you’ve built up as a down payment for another property, or it can be used to cover other expenses, or as a nest egg to be saved for the future.3
While buying a home is an investment in a tangible asset, it does have some potential downsides to consider, such as the cost of maintenance. From time to time, almost every home owner gets hit with the cost of repairs whether for a leaky roof, the need for a new driveway, or a new coat of paint to freshen the interior. Additionally, there are expenses such as property taxes and insurance that can be quite costly. For those who have borrowed to buy a home, the cost of interest on the loan is yet another factor to consider.4
While mortgage interest and property taxes are typical costs of homeownership, they can offer some tax advantages. For example, the interest paid on a mortgage loan is typically tax deductible to the borrower. Similarly, property taxes have traditionally been tax deductible as well, although the 2017 tax reform plan put forth by the current administration may limit this deduction in the future.5
While a home may be an excellent investment for some, it doesn’t come risk-free. Similar to other types of investments, the value of real estate can rise and fall over time. While homeowners are typically hoping for price appreciation over time, a housing market crisis, or volatile real estate market6 could significantly impact the value of one’s home.
Yet another point of consideration for those thinking of home ownership is a recent study that has shown that it costs more to own a home than to rent one in every state in America. While there are likely a variety of factors that contribute to the higher cost of owning a home, a significant portion of the greater expense is likely attributable to the cost of insurance and property tax6.
Renting: Possibly a Better Value
While some may have an appetite for owning a home, others may be more inclined to rent. For example, some may feel as though owning property is a shackle that will tie them down in the event they want to relocate. Furthermore, money invested in a home may be somewhat illiquid given that its value can’t be readily accessed until the home is sold. Yet another positive for renting may be a potentially lower cost of living. When renting, tenants are typically spared large out of pocket expenses when they sign a lease, and they are also typically free of the costs of property taxes and maintenance. Additionally, depending on the rental property, certain utilities such as heat and hot water may be included in the rent.
Consider as well the value of certain amenities that may come with the apartment complex. Many have lavish club houses with state of the art fitness and wellness facilities that may otherwise cost in excess of $100 a month in membership fees if the person were to join a health club on his or her own.
Deciding whether to purchase or rent a home depends on your individual situation, as well as the goals you have for yourself and your family. Work with your financial advisor to determine whether renting or owning may be a better fit for your American Dream.
Apella Capital, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, product, or non-investment related content made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Apella Capital or your advisor. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.