I talk to people on a daily basis who are stuck living the “American Dream”.
The plot goes something like this:
- finish college
- find a good paying 9-5 job
- to marry
- buy a highly leveraged house
- have kids
- Find a better paying 9-5 job
- shaped like a big house and a big mortgage
- send kids to college
- Down-size to a smaller property
- Hope you live and enjoy life for another 20 years without being forced to get out of bed every morning
Does this sound like you and your future plans?
In this article, I would like to challenge the above status quo.
Food, cloth and house are the three basic needs of human beings. After taking care of food and clothing, most of you start looking for a home to call your home. There’s no doubt that buying a home makes sense for some people, but it certainly doesn’t for everyone. Owning a home gives you stability. That’s what people say, at least.
So, when you are looking for a place to live, many people will tell you several reasons why you should buy your own home. However, some would say that home ownership as a path to wealth creation is nothing more than a marketing ploy by the real estate industry. And they have a pretty good case.
With that thought in mind, rental habits have changed over the years, as many people consider it a viable option. Financially speaking, owning a home isn’t always the best bet. I’ll go even further and tell you that if you want to make money, buying a house to live in is a terrible waste.
Let us look at the four best reasons why renting is better than owning a property.
Renting and Investing Why Buying and Owning
1. You don’t need a mortgage.
This is the most obvious but often misunderstood. While some people are able to buy a property with the savings they are prepared to spend, for most, a mortgage is considered the only way to buy a home. Most people don’t have that much money, and the best way to get it is through a mortgage.
So, even if the property exceeds the buyer’s bank account, they can still spend it on their home. It is easy to think of a mortgage as a safer option because it gives people the ability to spread that huge cost over a period of 25 years.
And that makes it easy, doesn’t it? All you have to do is make a monthly payment, pay a little extra to the bank on top of the original cost, and you’re done.
That small percentage that you have to pay in addition to the principal amount, despite the mortgage interest deduction, adds up to a huge amount over this long term. Taking into account the interest, it is easy to pay double the amount of the original purchase after 25 years. But it’s all quite understandable.
However there is one thing that is always forgotten. A mortgage is a loan.
So what? You are making your monthly payments, and they are probably less than your rent payments. But rent is an expense and not a loan. And that’s the one thing that makes all the difference.
Buying a home against a mortgage will multiply the debt to income ratio you already have. This has one major consequence: If you need to borrow money for other essentials, such as student loans or a car loan, it will be harder for you to get it.
Connected: Buying a Home is a Bad Idea Myth
This means that all the money you had for your house is just sitting there and you are having to spend more money. You can’t do anything with that money, and you certainly can’t use it to invest and make more money.
Owning a home will generally cost you more per month than renting anyway. To this day, I still rent and use all my personal funds for investment purposes.
I like to joke about my personal money as “the little soldier.” They are always fighting and making more money than me rather than being stuck in a bunker and being able to move around.
2. People borrow more than their capacity.
When you are out to buy something, you just see the price attached to it and depending on how much you can afford, you will buy it or not. In this case you can usually only spend what you have in your wallet or in your bank account. However, when you are getting ready to buy your own home, things change. With a mortgage, a small increase in monthly costs can make a big difference to your budget. It’s easy to go too far and be tempted to pay more than you need to.
Many of the people who are involved with getting you in line to buy a property, such as your real estate agent and mortgage broker, can play on your emotions and get you to commit to something you really shouldn’t. should do. And in any case, you think it’s a good investment, don’t you? Well, reality paints a different picture. Currently more than 10 million homeowners in the US are under mortgages worth more than the actual value of their homes. And they keep paying these mortgages for years and years. I’m guessing these people no longer think they made a good investment.
With rent, you know what you’ll be paying next month, and you don’t have to worry about paying too much for a property. If for whatever reason you can no longer pay the rent, you can find another property with a cheaper rent as soon as your lease is up. Another advantage is that the lease is fixed for as long as the lease is active, and if a landlord decides to raise the rent, he or she must give you notice. So, no surprises and no headaches.
3. You are no longer mobile.
With globalization, people have become more mobile. But even when you’re not leaving the country, people still change jobs a lot more than in the past. This is even more the case for the latest generation that has hit the workforce. The change of job of all these people leads to complete transfer. Many people choose a specific area simply because of how close it is to work or the children’s school. If you’re one of those people, it makes a lot of sense to remain flexible with where you live. If you buy a house, that mobility is gone.
That certainly doesn’t happen when you rent. You are almost as mobile as you want to be and that has its benefits, perhaps even more so for the younger generation. When you want to make the most of your life, you need to be able to take advantage of every opportunity that you can. When you are tied to your home, you have to give up a lot of possibilities. When you’re renting, a whole world of opportunities is just there for you to take. Look at me for example. I packed my bags and left Sydney, Australia for Kansas City. All this happened within two weeks after some minor arrangements.
Connected: Are the extra mortgage payments worth it? numbers at a glance
4. Homes have operating costs and maintenance.
While the value of a home increases over a certain time period, the life of the equipment in the home does not. Since properties are valuable assets, owners do their best to keep their homes well maintained. This means that the owner will spend money on repairs, modifications, redecoration or annual general service fees to maintain the value of that property.
The cost of ownership is usually something that is overlooked, but it can add up to a considerable amount. A leaky roof, frozen pipes, a pool to care for or simple home improvements are just a few of the expenses that are always on the homeowner’s mind. Apart from this, the owners also have to pay annual property tax and various other miscellaneous expenses.
Now, don’t forget that even if you become a landlord and put your little soldiers (money) to good use, you’ll still be hit with all kinds of expenses, but in this scenario, the property you own, It will be rented out and should be producing a significant amount of cash flow. In turn, paying for the expenses should not directly affect you, as they will be covered by the rent you receive from your tenants.
Despite all this, it is still very common for people to push you to buy instead of rent. Here’s a good way to look at it. If you plan to stay where you are now and are not looking for financial growth and greater independence, then buying a home may be for you. Everyone else should really reconsider – because owning a home can be much more expensive than your monthly mortgage payment.
And don’t forget about those little green soldiers who are marching and fighting for you day and night.
Do you agree or disagree? Why?
Leave a comment and let’s discuss!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
