Attention Renters: Are You Missing Out on More than Just Cash?

Post this question to any homeowner who used to be a renter, and you’ll invariably get the response of “Yes!”  Sure, there is a time in nearly everyone’s life (college, newly married, etc.) when renting a home is much more cost-effective and convenient than owning a home.  But when you stop and think about how much money is wasted by people who consistently write large rent checks each month, you begin to see why long-term renting is generally a bad financial decision. 

As with every rule of thumb, there are exceptions.  Those who live in large metropolitan areas – where housing costs are well beyond exorbitant – are probably wiser to rent than to buy a home of their own.

However, for everyone else, the advantages of owning far outweigh the advantages of renting.  Let’s being by looking at a home purchase as an investment, and explore how that investment can work for you in the future.

But first, I would like you to take 30% of your paycheck to the nearest garbage can and toss it in. Close the lid and walk away.  If that extreme demonstration of paying monthly rent doesn’t get your attention, then you probably have plenty of money and don’t need to invest it wisely anyhow.  But few people will nod in agreement with that statement. That’s why, when you make a monthly mortgage payment, you can feel secure knowing that your hard-earned money is not only paying for your current home, but also being invested in your family’s future.

Consider for a moment the cost of university education.  With education costs rising steadily, you will need to augment your children’s college funds.  Financial experts around the globe are recommending that parents borrow against the equity in their homes to help pay for educational costs.  The benefits include lower interest rates, longer repayment terms and loan terms that are otherwise unavailable to most borrowers in educational loan programs.

Now, consider just HOW MUCH money is being spent when you choose to rent (and not own) your home. If you are currently paying $1,000 per month for rent, that amounts to $12,000 per year or $48,000 over the course of four years.  Did you realize that for $1,000 a month, you could be making mortgage and utility payments on your own $100,000 home?

Additionally, as you continue to reduce the principal of your mortgage, you are effectively building equity in your home.  And, unlike rental payments, your mortgage payments are tax deductible when you opt to itemize your deductions.  While some homeowners choose not to take advantage of these tax deductions, those who do are generally pleased to find substantial savings on their annual taxes.

Finances are not the only thing you need to consider when you decide whether to rent or buy a home. Here are three more important things to consider in your decision.

Tax Deductions
When you own a home, local property taxes can be quite substantial in some areas.  Homeowners may deduct 100% of the real estate taxes paid on their home. Renters are not required to pay property taxes, although the landlord will undoubtedly include the cost of all taxes in the tenant’s monthly rental amount.  Therefore, the renter is in effect paying the property tax, but is unable to claim the deduction.

For most homeowners, the interest paid on a mortgage loan is also deductible in its entirety. The tax savings, as mentioned above, can be quite substantial. Renters are in effect paying the mortgage for their landlord, or some portion thereof.  However, regardless of the amount of interest being paid, there is absolutely no tax benefit for the tenant.

When a new home buyer obtains a mortgage, he or she is often required to pay what are known as “points.” Basically, points are what the mortgage holder pays to the lender for the right to use the lender’s money.  Be aware of this cost and know that when you take out a mortgage, you may deduct points only for the year in which they were paid.

A homebuyer is eligible for certain tax deductions that are not available to a renter. Therefore, when you are planning to purchase a home, keep close track of possible tax deductions throughout the calendar year in which you intend to buy.  Working with a tax advisor is probably the best option, particularly for a first-time buyer.

Moving
If your employment requires frequent relocation, then perhaps renting is truly the best option for you. However, if you plan to stay in one city for an extended period of time, it might be wise to consider buying. 

Obviously, when you are renting and you need to move, the only thing you need to do is cancel your lease and pay any early cancellation fees.  In contrast, when you own a home and plan to relocate, you will probably need to sell your home.  This may require making repairs and incurring pre-sale costs, realtor commissions, and other expenses, not to mention the investment of time required to sell a home. 

Unfortunately, regardless of whether you rent or own your home, relocation expenses are unavoidable when you move. However, relocation expenses tend to be less for renters than for home owners.

If you do opt to sell a home with the intention of purchasing a new home whose value is at least equal to that of your current home, you may be able to defer any capital gains taxes that may be assessed after the sale.  Again, in order to fully understand the tax structure and possible deferment options, you must speak with a tax professional.

Home Improvements and Remodeling Projects
In most cases, unless you own a home of your own, you will be unable to make extensive improvements to the property where you live.  This probably includes things like adding a swimming pool, deck or replacement windows.  Naturally, some landlords welcome their tenants to make such improvements. However, it is generally not a good idea to invest money in a home that you do not own.

If you rent a house, you may have the option of painting, replacing carpeting and performing other minor updates with the approval of the landlord.  However, if you select an apartment or a townhouse that is located within a “complex,” you are less likely to be able to obtain that permission.

In contrast, when you own your home, you have the unrestricted ability to decorate, improve and remodel your home as you like.  You can install a backyard swimming pool, add an additional bathroom, and more!  Perhaps this is the greatest benefit that people get from owning their own home.  They no longer need to request permission to paint a room!

Having reviewed just these three areas of comparison, in addition to the financial information presented above, you are probably closer to making the decision on whether to rent or buy a home. If you have made the decision to buy a new home, then congratulations! You’ll want to work with a licensed realtor to start the process. 

A competent realtor will share his or her experience and expertise with you, simplifying the home-buying process and the transition from being a renter to home owner.