Your Money_ The Missing Manual - J. D. Roth [98]
So far, you've read about a lot of different ways to save money: You know how to spend less on groceries, trim your transportation budget, and use credit wisely. Everyday thrift can boost your cash flow, helping you to get out of debt and save money. But even all those changes combined don't have the power to affect your budget like what you spend on housing.
This chapter will give you the facts you need to make smart housing decisions.
The Eternal Question: Rent or Buy?
Deciding whether to rent or buy is a complicated financial and emotional decision. Real-estate agents like to say, "Renting is like throwing your money away." On its surface, this advice seems to make sense, so it gets repeated a lot in popular culture. But in a 2008 issue of Newsweek (http://tinyurl.com/nw-rentok), Robert Shiller, a professor of economics at Yale University, wrote, "The popular argument that renting is equivalent to throwing money down the drain is really fallacious."
In some cases, it does make financial sense to buy a home. But in other situations, renting is the better choice. And often, there's not a lot of difference between the two, especially if you're smart and keep costs low. The decision usually comes down to personal preference. Let's take a brief look at the pros and cons of each.
Here are the advantages of owning your home:
Stability. When you take out a mortgage, you know what your payments will be for years to come. There's no landlord to change the rules, and you don't need to worry about being kicked out at a moment's notice.
Equity. As you make your mortgage payments, and as the property's value increases, you build equity, which is the difference between what you owe on your house and what you could sell it for. In other words, it's how much value you have stored in your home. For example, if your house is worth $225,000 and you owe $175,000, you've got $50,000 in equity.
Freedom. You can do what you want with your home and yard, like plant a garden, paint the ceiling purple, or install a wet bar in the basement.
On the other hand, the advantages of renting include:
Flexibility. With a rental, you don't have a long-term commitment. You can move on short notice, whether to get away from bad neighbors or to take advantage of lower rents elsewhere. There's also a wider range of rental options than homes for sale. It's difficult to buy a tiny house, for example, but you can easily find one- or two-room rentals.
Lower costs. In the June 2007 issue of Kiplinger's Personal Finance (http://tinyurl.com/kip0607), editor Knight Kiplinger wrote, "It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes." True, you don't build equity when you rent, but you're not burdened with taxes, insurance, and maintenance costs either. You can use the money you save to travel or buy stocks.
Lack of responsibility. When you rent, somebody else does the yard work and repairs the leaky showerhead. (Of course, this can be a disadvantage if your landlord is slow to respond to problems.) All you do is stick to the terms of your lease or rental agreement and someone else takes care of the rest.
Both sides of the rent vs. buy argument can trot out numbers and statistics to prove why they're right and the other side is wrong. The bottom line is that the decision isn't just a financial one, so it's hard to generalize. Yes, renting can save you money and it comes with far fewer hassles than owning. But owning your home can give you non-financial benefits.
The best way to decide is to think about your goals and figure out what makes sense for you.