Owning one’s own home has long been a key component of the American Dream, and the allure of striving for that goal and enjoying the fruits of those efforts is certainly understandable. It may be the right choice for you now or someday, but real estate professionals and economists often recommend renting as a better option and warn that many people buy when they rent instead. In that spirit, we’ll consider why renting is better for so many people.
Perhaps the greatest reason why renting is better now than in years past is because of the unstable market. The more stable the housing market, the easier it is to project your expenses and return on investment. The crisis that occurred in the mid-2000s had a very real and devastating effect. You may hear on the news that the market is recovering, and while that’s certainly true from a bird’s eye perspective, it isn’t necessarily true market to market and person to person. It is much harder right now than two decades ago to purchase a home at a price you can be confident in over the mortgage term.
The Myth of Equity
You’ve certainly heard it before: renting is throwing money away. As the belief goes, paying rent is more expensive because paying a mortgage has residual value in the form of equity. There’s also a notion that renting is forever and mortgages end. The truth is that housing is an expense that most Americans will pay their entire lives. Equity is certainly a real thing, but how much value does it have and is building it the best use of your money? The answer to that question is often no, and that’s another reason why renting is better in many cases. The real value of owning a home is more philosophical in nature. Equity in a primary residence is more about a long-term effort to keep up with inflation. You could take the additional amount you’d spend on the mortgage and come out ahead by investing in an index fund.
Up-front expenses are another reason why renting is better for many people. Property managers in Park Ridge often use a rule of thumb to calculate rent: 1.1 percent up to $100K. That percentage incrementally decreases as you climb the value ladder. So, let’s say you rent a $100K home for $1,100 a month and are required to pay first month’s rent, last month’s rent, and a two-month security deposit. That’s a total cost of $4,400, but as a good tenant, you’ll get $2,200 back, and you’ll also earn interest on that money as a Chicago resident. The ideal down payment to purchase that home is 20 percent or $20K, and you’re going to need very good credit to get as low as 5 percent or $5K.
There’s also the matter of property taxes, which is a financial obligation you’ll need to meet on a yearly basis. As of the 2017 property tax bill, the average Chicago homeowner will pay between 3.9 and 6.5 percent depending on where they live. Even if we assume the most favorable rate of 3.9 percent, that means that in our above example, you would have an additional annual obligation of about $1,800 once the various exemptions are factored in.
Maintenance and Repair Expenses
Ask any property management company in Park Ridge what it costs to maintain a home on an annual basis. The numbers may surprise you. Unless you’re fortunate with rising land values, this is why it’s very difficult to turn a profit on a primary residence. Hidden costs are a big part of home ownership. While home insurance will certainly offset some of that, it doesn’t account for all of it, and it certainly doesn’t account for all of those small repair bills that add up over time.
Home vs. Renter Insurance
Insurance is another reason why renting is better. Consider that the average insurance policy for renters costs about $12 a year. With that, you’ll get a relatively low deductible and coverage for all belongings. A similar home insurance policy will cost at least double, and at that rate, your deductible will be high, which makes it more difficult to offset your hidden expenses. Most policies are between $25 to $80 a month, and the average in this area is much closer to the upper bound than the lower one.
More Location Options
Based on the way property managers in Park Ridge calculate costs, we can deduce that a home which costs $1,000 a month to rent would cost at least $1,500 a month over the long-term to own. If you make about $40K a year, then $1,000 a month is your limit. In other words, renting allows you to live in an area that you wouldn’t otherwise be able to afford.
Access to Amenities
Another reason why renting is better is that you can have access to amenities that you might not be able to afford otherwise. A swimming pool may be too expensive to install and maintain, but it should be reasonably easy to find a rental with one. You can also take advantage of free or reduced-cost Wi-Fi access, private parking, gated access, playgrounds, dog parks, so on and so forth. Renting allows you to target the living environment you want and have a good idea of what you’ll pay for it up front.
Last but certainly not least, renting often gives you a great deal of flexibility. If you have the opportunity for a new job in another state, for instance, selling your home, finding a new one and planning relocation can be a significant undertaking. With a lease, that task is easier. Leases are short-term, and you can break them when absolutely necessary. You might lose your deposit, but you’ll incur many other costs as an owner.