We all have desires to live the American Dream and part of that dream is owning property? I know for a fact that houses provide the average person the ability to increase net worth. When you have that responsibility of owning your home, you feel a sense of pride and can take on projects that increase the value of the house with ease. Because there’s so much involved with owning a house that it just increases your get to work with a hammer skill, even if you contract out the big jobs, you will learn smaller tasks around the house. There’s over a hundred million videos on YouTube on how to maintain your house, coupled with famously tailored HGTV shows that give you a plethora of ideas on how to get the best bang for your buck. Over time with all the upgrades, increased equity, and home market values rising, these are usually signs of increased wealth for many homeowners. Now let’s talk about the benefits as well as the drawbacks of home ownership that you need to know right now.
The Good:
Do you know that owning a residence helps you lock in fix housing cost for a set number of years depending on your loan terms? (This excludes the taxable portion of housing obviously) Eventually if your smart and avoid the constant turnover of upgrading homes, you can be mortgage debt free in about 10-15 years. Here’s a cool secret the banks don’t want you to know, your housing costs when retired should be as minimal as possible. Why because most people over 60, should not be working anymore in the traditional sense. By 60 years of age, I feel everyone should live on their terms (shall we say real freedom finally) for example traveling the world if that’s what they desire. Traveling is made very easy when you have no mortgage payment or rent due, when you are retired.
If traveling is not your thing maybe you want to give away your time with excellent heart filled volunteering opportunities. Every time I volunteer I feel a sense of pride and happiness. Take a second and decide what you want to do later on in life, and how conveniently easy it will be without a mortgage payment hovering around like a drone over your head.
In addition to the low cost of living later on in life, by owning a home you will have a safer bet against the dreaded inflation. If you rent your residence for 60 years, every year you rent the payment gets higher and higher. Why because the land lord wants more income, and in general housing costs in most markets rise due to inflation. A $1000 dollar apartment today will probably rent for about $3000 dollars in 25 years. Now if you buy the home and your mortgage is $1500 for 20 years, at least you have a sense of security that every year it will stay the same. (Excluding taxes and maintenance of course) Granted it will behoove you to do a rent vs. buy calculation in your area to provide the best possible results for individual scenarios.
The third and final good for living in a home, is no worries about noise, living with pets and having a backyard space to entertain. Granted not everyone cares about these three perks that fabulously arise with homeownership, but I bet the percentage of people that care is greater than the people who do not give two cents about back yard pavers. When you rent a home you can enjoy this perk as well, but the first two tips listed above do not apply to your situation if you live in an apartment. These three goods are greater especially for people with children running around, as kids need space to go wild. I have these concerns because I have a family, and it will benefit us to one day not have to be cautious over noise. Another tidbit is if you want a dog aka man’s best friend to live with you, in this case a house is your best bet. Most apartments and landlords have restrictions to living with pets when you rent from them. Reason being because pets cause damage to the floors and the walls.
The Bad:
Houses tend to be more expensive due the all the added costs. Taxes are the 2nd biggest chunk of house expenditures, in addition you can add up insurance, and maintenance to the mix. All these costs might be a jolt to the system in the first 3-4 years of owning a home, but eventually you will get used to all the costs. Next in the line of expenses is utilities and it will cost you at least double in costs to the traditional apartment rental? The additional expenses is enough to scare many renters away who have limited income as is, but with some bravery injected your way, you can be a homeowner one day.
The Ugly:
Houses can be lost due to foreclosure from an unexpected loss in income. This is a rare occurrence that was not so rare in 2008-2009, but studies show that millions of foreclosures are still happening in the US. It’s a given that emergencies arise and people can get into difficult situations with their homes. In the case of foreclosure prevention you want to have a good emergency fund, to weather any job loss, and you also need to have income streams from various sources to keep things balanced. Never depend on only 1 income source.
The other ugly fact is damage from Mother Nature, and this is a hard thing to overcome. I know several people who are still trying to repair their homes from Hurricane Sandy. Imagine that 2 years later still dealing with contractors to fix this and negotiate that. To prevent people from losing their home to the elements, buy in areas where flooding, hurricanes, or fires have not occurred in the last 50 years. This is not a complete safe bet, but it is safer than buying a block away from the ocean.
Recap:
The Good: Lock in the same Housing cost, Protection against land lords and inflation, No issues with noise, backyard space for entertaining, and pets are always allowed if your the owner
The Bad: Houses tend to be more expensive early on due to taxes, maintenance, and Utilities, it can take up a big chunk of income
The Ugly: Foreclosure is a possibility, the elements can cause havoc on your residence
What is the American Dream you prefer?- Homeownership or Rentals?
Comment if you like to add more benefits or drawbacks to the discussion around homeownership?
Rich Uncle EL
I think you make a great point that home ownership is not always the best option in all circumstances. Sometimes it absolutely makes more sense for someone to continue renting. We do own our home, but it wasn't a decision we made lightly. And, it takes quite a bit of upkeep on a regular basis.
Upkeep, taxes and utilities are a nightmare for people who live in the northeast area like us. Here in Nj taxes can be over 800 dollars a month.
You make a good point about your mortgage bill will stay the same for the length of the term (assuming you have a fixed rate loan) whereas rent will keep increasing on a regular basis. It's good to note that even though your mortgage bill will be consistent, you will have to pay property taxes which will typically rise each year.
In the end, the smartest choice is the one that makes the most sense for you. Don't just assume buying a home is the best choice simply because you will build equity. Figure out what makes sense for you and go that route.
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The point is we all want a steady housing expense that will be reduced as income rises and not be exposed to inflation. So that’s a great benefit to being a homeowner. Taxes on the other hand can be a dreaded issue depending what state you live in. Thanks for the comment.
You make a very good point that owning a home is not for everyone. Upkeep is one major expense that many folks do not allocate for each month.
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It’s a major expense, and even bigger budget buster in the north east. Thanks for stopping by Derek. How’s Georgia?
Its a very interesting debate, but for me home ownership comes out on top from a financial standpoint, but carries two VERY important caveats:
1) There is a very small chance that you will move house in the next 5-8 years.
2) You are financially ready. If you lost your job and owning a home would financially cripple you in 12 months, then the risk of foreclosure would be too high and renting would be a better option.
I think it is the same in the US, but in the UK there is a great desire for young people to "get on the property ladder". This is an objective completely irrespective of the two points above, which can make it a very dangerous endeavour financially.
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Two very valid points moneystepper, that’s why potential homeowners should be prepared with a good amount of reserve funds and put down as much as possible to avoid risks later.
I just sold my home short sale a few months ago and trust me that whole process was so stressful. I agree that owning a home is not for everybody. Even though I had that bad experience, I still believe that home ownership is for me and I get back into the market as soon as you can. People just really need to take the advice to have reserve cash in the bank just in case.
Hopefully you will get out from under any further bad times, and you can be an owner again soon enough.
I did not live in the States long enough to buy an apartment, though I would have done so had I lived there longer.
I was, however, surprised when I moved to Vienna, Austria to see how many people I know are not interested in buying property. They prefer renting. I guess it is easy for them because they have pensions and know that they can afford renting when they retire. Owning your own home in Zambia is a must because you can save a lot of money. The house does not need to be finished before you can move in. All you need is one outside door that you can lock and secure windows (even if those windows have been closed off with a wall that will be demolished when you can afford to buy window panes).
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Yea, housing is very expensive here in the northeast. I definitely don't think homeownership is a must like many in the media argue, and that renting is perfectly fine. Especially when you're young and you don't want to be tied down to one location. But for me…buying a place, though it's a co-op, made financial sense since the cost was comparable to renting.
I agree it is not for everyone, but if its in the 10% range between buying and renting costs, it might be worth it to buy if you plan to live in the home 5+ years. In my area with taxes and maintenance costs, the difference between renting and buying is over 1000 dollars. Might have to look into short sale properties or move to a different area to make the numbers work and still be able to achieve financial independence.
If I offered you an investment that cost 5 percent of value upfront and 10 percent to sell, that has a historical return of 2-3 percent per year, would you buy in? Of course not!
The only reason a house is a good financial decision is because it's currently subsidized by low leverage rates (ie your mortgage interest rate). Conversely, most people do buy based on payment, so when rates go up, prices come down. It's a lose/lose vs renting with rare exceptions (buying a property in which you can get some rental income while living in it, or places with ridiculously high rent are examples of said exceptions).
Now, all of that being said, if you really want to live in a house, please be my guest, its your money and it's better than financing a car or new clothes, but PLEASE purchase only if you are going to live there long term (15+ years) AND below your price range (payment not more than 25 percent of gross income).