Homeownership has long been viewed as a major component of the American Dream, complete with the image of a quaint house, white picket fence and a friendly neighborhood. Renting tends to play second fiddle in our society, being seen as a temporary housing solution while people save for a down payment or otherwise financially prepare for a home purchase. The notion of “throwing money away” on rent is spouted often, leaving renters harboring guilt that they are not taking care of their financial business.
In the real world, the choice to rent or own the roof over your head can be much more complicated. People put a lot of emotional stock into where they call home. As with all big financial moves, your unique situation plays a huge role in where you should live and which real estate path you should follow.
As we find ourselves amid a housing market squeeze in the U.S., it begs the question: Which is the right financial move for me?
The homeownership path:
Time, time, time. Financial success through owning real estate is certainly possible. As you would expect, homeownership has more potential to be financially fruitful if you own your residence for many years. Unfortunately, Americans tend to move around much more frequently. Upsizing every few years can make accruing wealth through homeownership considerably more difficult. The transaction costs alone of high housing turnover eat away at potential equity quickly.
Navigate the cycles. The real estate market is cyclical. It is important to evaluate whether you are buying or selling during a buyer’s or seller’s market. Ideally you would purchase in a buyer’s market, with ample properties to choose from at competitive prices. The opposite is ideal for selling. You would like to sell in a seller’s market, with multiple competing buyers bidding up the price of your home. Of course, selling when the market is hot can create its own headaches if you need to pay for another house to live in once yours is sold.
Keep FOMO at bay. The big pothole to avoid is buying when real estate prices are high. Regrettably, FOMO runs high in our social media driven world, where it can feel like everyone you know is buying homes. But buying at the top can leave you financially stuck in your house until the next real estate cycle comes around and prices resume their upward trend.
Hefty down payment. Most of our clients are experiencing a seller’s market these days. Right now, it is highly unlikely to have a competitive purchase offer without bringing a big chunk of cash to closing and oftentimes paying above asking price. It usually takes years for people to save up enough for a down payment. The major downside to these large down payments is that once your purchase is finalized, that equity is tied up in your home. It can be quite difficult to access those funds should you have the need for the money elsewhere.
Consider the costs. As a homeowner, you are on the financial hook for property taxes, insurance, general upkeep costs and major repairs. That is on top of paying your monthly mortgage and utility bills. From a cashflow perspective, homeowners tend to have higher monthly expenses than renters, making socking away additional savings a tougher ask. Many owners use their extra cash for big renovation projects, a cost that may or may not be recouped in the eventual sale of the property.
The renter path:
Real estate accessibility. Renters have more opportunity to move around with ease, as rental agreements tend to have shorter terms and greater relative flexibility. Renting can also allow for easier access to high priced real estate markets, where owning may be out of the question cost-wise. Those big metropolitan centers can present high paying employment opportunities and good standards of living but can present major cost and accessibility barriers to owning real estate. This often leaves renting as the only financially viable option.
Cashflow benefits. In addition to the potential for greater income, renters are not usually beholden to upkeep and maintenance costs. If something breaks due to normal wear and tear, the property owner is typically on the financial hook, not the tenant. The result can be higher monthly cashflow, as a renter’s housing expenses tend to be more consistent and lower than they would be if they owned a comparable property.
Disciplined saving. What renters do with their extra cashflow is where the financial outlook gets murky. Renters are left to their own devices as far as savings is concerned. Mortgages by design can be considered a mechanism for forced saving. Homeowners are putting money away just by keeping up with their monthly principal payments. Since renters have no mortgage note to pay down, they must be disciplined about utilizing other avenues of investment to grow their wealth. Placing money into retirement accounts, starting businesses, and investing in the stock market are all solid options for generating wealth outside of the real estate world.
Where you live is a key factor in your ultimate financial success. What you do with your money once you have decided which housing route to take is equally important. If you are unsure how renting or owning can influence your overall financial picture, creating a financial plan can be quite beneficial. Interested in our financial planning process? Reach out here to schedule a free introductory appointment.