Opportunity Cost: The Case for Renting vs. Buying a Home

So, are you tired of renting and thinking of purchasing your own home? You will either need to pay cash for the total cost or come up with a sizable down payment, probably 20% of the total cost. Either way, that is a large chunk of money, funds that could be invested in other ways rather than in a home.

Opportunity cost involves one option being forfeited so another option can be gained. Maybe you have the opportunity to purchase a home, and you’re tired of “throwing money away on rent” as I’ve heard so many people say. However, rather than investing in a house, would investing in other things be more profitable?

Sure, homes usually increase in value over the course of time. The rate of inflation does certainly tend outpace a fixed monthly payment (assuming you have a fixed and not an adjustable interest rate).

However, how does the rate of inflation compare with the variable costs associated with mortgage payments such as property taxes and insurance? These tend to increase right along with inflation.

So, maybe you aren’t willing or able to wait for inflation to make your payments seem low. Maybe you’re needing to relocate right away for whatever reason. You’ll still need somewhere to live. So any equity you have, if you have any, will go towards a new place to live.

Additionally, home prices continue to rise along with mortgage rates. It’s a catch twenty-two. Not only has your home increased in value but so have other comparable homes. In other words, you could be stuck, unable to find an affordable home replacement.

Or, what if you aren’t looking to move at all? You’d like to stay put in your home, but you’d still like to cash in some of that equity. A home equity loan will create a larger liability, higher monthly payments and put your home at risk.

In other words, unless you sell your home or take out a risky equity loan against your home, the increase is inaccessible. Plus, the above scenarios apply only if the home’s value has risen. If value decreases, you have no equity, no increase. You cannot refinance for a lower rate. You cannot sell without a loss.

Long story short, maybe a house is not the best investment. Your house won’t generate cash flow such as dividend or interest income. Instead your house will generate expenses: interest, taxes, insurance and HOA fees, not even mentioning expensive repairs and upkeep. Additionally, an increase, if any, is difficult, at best, to tap into.

An important factor in deciding upon what to invest involves timing. You must be able to control the timing of the sale. Pick an investment that will offer readily accessible returns, while not requiring constant cash infusions.

To conclude, consider the following points as well:

  • A homeowner has the flexibility to make alterations and changes. A renter can make temporary changes and take the investment with them when they move out.
  • Today’s market is resulting in job insecurity and the need to be mobile. Bound by only the term of the lease, renters enjoy a very easy exit strategy. They have flexibility to upgrade or downgrade as desired.
  • Home mortgage insurance is tax deductible, but in many cases, if a renter is moving for work related relocation, they could also be eligible for tax write-offs.
  • The real estate bubble portrayed volatility with property values fluctuating from area to area. Renters do not face this type of risk.
  • Granted, rent tends to be higher and available properties are typically more scarce in hot job markets. However, renters can generally afford to be in close proximity to high-demand downtown areas. Homeowners, not so much.
  • Lease rules can be limiting, but also offer you protection, peace of mind and aid in ensuring your quiet enjoyment of the property.
  • Home buyers, if needing financing, must have exceptional credit and/or a significant (10-20%) down payment. Renters do not necessarily have to have excellent credit. Good rental references often suffice.
  • Unlike with applying for a mortgage, you typically do not have to jump through hoops and divulge your entire life to rent.
  • You do not need expert guidance to rent (a realtor or a lawyer).
  • Renters do not pay property taxes, property insurance or mortgage interest.
  • Renters insurance is much less expensive than property insurance, only insuring contents, not the entire dwelling.
  • Renters don’t pay homeowner association fees, but often get comparable benefits- gated community, pool, tennis courts, gym, etc.
  • Rent rates are guaranteed for term of lease. Due to taxes and expensive property insurance, mortgage payments can vary, especially with adjustable rate mortgages.
  • SO much can and will go wrong with a house, and the repairs are at the expense of the homeowner.
  • Homeowners tend to have more space (larger home, large yard, garage, storage), but they also have more to clean, mow and maintain. Most repairs and upkeep are included in a tenant’s lease contract.
  • More space also means higher utility bills. Apartment units are typically designed to make efficient use of space. Less space of course typically equates to lower utility bills. Also, some utilities could be included in the rent.
  • Privacy versus loneliness- A home is typically more private, but with multi unit properties, you have many neighbors. With lots of amenities and community gatherings, it would be hard to get bored or lonely.
  • Apartments and multi-unit complexes tend to be close to attractions and the livelier parts of town.

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