For some people, renting—for at least awhile—is a wise financial decision. We generally buy property in hopes that we will be better off financially down the road than if we did not buy property. For some, buying real estate may put them in a more precarious position than if they remained a renter.
If you find yourself in any of the following scenarios, you may be someone who is better off as a renter than a homeowner.
1. Real estate has significant transaction costs when you buy and when you sell. If you want to come out ahead financially when you sell, the value increase of the property you buy has to be more than the total transaction costs of the deal.
Aside from transaction costs, there are other expenses of owning real estate—especially the things the owner may do before he or she sells: new flooring, landscaping, appliances, etc.
Who should avoid ownership? If you are someone who will only own a home for a few years, you should probably remain a renter. People like military employees and professional athletes move around often and in general, would most likely be much better off to stay renters until they are settled in a city where they are sure they will be staying for a long period of time.
Five years is typically the break-even point where it probably is better to own than rent, but again that also depends on the difference between the cost of renting and the cost of owning.
2. Another scenario that makes it more expensive to own than rent is when you live in a place with a glut of land and rentals. This is common in revitalizing downtown areas where cities construct luxury condominium projects, and there are still many lots available for building additional properties, as well as a large amount of vacant or rental properties.
It probably makes sense to consider staying a renter in those areas, because rentals are widely available and most likely more affordable. You might be paying an extra $750 per month or $9,000 per year for the “pride of ownership." Year two as an owner may still have $8,750 more in costs than if you rented, year three could cost $8,500 more to be an owner–and these costs add up each year! You could be in the “red” for ten years, adding up to $60,000 to $70,000 or more to your costs. Your hope would be that the appreciation in value would compensate for these huge cumulative annual negative amounts–but the odds are against you.
For many, staying a renter is a smart financial decision. If you are considering a home purchase, make sure it will be a long-term decision, and in an area where there aren’t too many rentals or vacant properties.
Your best chance of increasing your wealth through real estate ownership is buying property that suits your wants and needs and to hold it for a long time — the longer the better.
Leonard Baron, MBA, CPA, is contributor to the Zillow Blog and a San Diego State University Lecturer and the author of several books including Real Estate Ownership, Investment and Due Diligence 101 and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.