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Thursday, September 01, 2011 Business Attorney In Houston Answers, "Is It Really Cheaper To Rent?"By Kim Hegwood, Business Attorney In Houston
Long-time renters often cite all the
negatives of home ownership, and there are some to be sure. But many
of these oft-cited reasons have a valid counterargument OR these old
paradigms are no longer accurate:
Current Conception #1: It Is More Expensive to Own Than to Rent
-- This is probably the biggest myth out there that many proponents of
renting continue to propagate. Primarily, at this point in time, with
home prices having crashed and interest rates at record lows, the
rent-to-buy ratio is favoring "buy" in many parts of the country, more
so than at any point in recent history.
Now this is not just a rah-rah "buy a home" Note, and I would concede
that it is entirely plausible that home prices continue to decline for
several more years. But if you are not buying to sell, but rather buying
to live, it can be MUCH more economically efficient to own over rent,
especially at this time.
Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm
Let me repeat: It is becoming cheaper to own and it is becoming more expensive to rent.
In my analysis, this trend will continue for years.
Why? First off, the Fed's policy has been to reward debt holders and
punish savers with the unprecedented a) zero interest rate policy and b)
projecting out through 2013 that rates will stay low. This in turn, is
pushing up gold prices and equities prices, and investors are pricing in
future inflation. This bodes well for landlords, and poorly for renters.
See, this interest rate/inflation phenomena mixed with the new ratio of
renters over owners is flooding the market with renters and starving
the market for buyers. This makes homes more affordable, while landlords
are embarking on higher annual rent increases.
Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. Put
aside the premium you might pay if you got in a bidding war over a home
or made some upgrades to your home that weren't necessary. Simply
baseline the same property and look at renting versus owning it.
Everything you pay for as a homeowner, the landlord has to pay for as
well. Who do you think pays for that? Do you think the landlord pays for
snow removal, replacing carpets, fixing leaks and a new roof every 15
years out of the goodness of their heart? No -- you pay for it! It is
all priced in over long-term rent trends. Landlords are in this business
to make money and if they were not making money they would not be
landlords. You are paying to put their kids through college and for
their Caribbean vacations.
Basic economics dictate that over a long period of time, you are losing
money by renting, not just because you are not building any equity,
getting a mortgage tax deduction, etc., but because you are paying for
the upkeep, depreciation expense and maintenance of the home in your
rent -- PLUS a tidy profit to the landlord.
Many renters are convinced they are "beating the system" because they do
not have to pay for these things, but they are -- it is just not
itemized out in tidy fashion for them. It is all in the rent. This is
logic -- and reality.
Current Conception #3: Renting Provides for Much More Flexibility to Move.
This is a major (and legitimate) reason NOT to own. After all, closing
costs, transfer taxes, realtor fees and such are nothing to sneeze at.
However, what a lot of renters end up doing is deciding to rent instead
of own, but then they never move! They end up renting for years on end
when they could have owned.
And that flexibility? Well, the landlord also has the flexibility to
keep increasing prices year over year at whatever rate they so choose --
which then requires a calculus on your end as to how much of an
increase makes it worth moving out, in order to just rent somewhere
else. Additionally, you are often locked into an annual lease (which
isn't very flexible), they can sell the home or put new tenants in each
lease cycle (which is not very flexible), and you can't do many things
to the place you live in without their permission or perhaps not at all
(not very flexible). So, you are trading the slight mobility
flexibility for a lack of flexibility in virtually everything else that
the landlord controls.
To reiterate, if you are a current renter, you may feel this Note is
critical of your situation. It is not. It is an economic reality that
many Americans never have had, or never will have the economic means to
be a homeowner. This is a mathematical certainty. The point here is to
get my clients and friends thinking who DO have the means to save for a
down payment, and who may be better off financially as owners than
renters ... but who continue to muddle along in complacency because
they've convinced themselves that homeowners get hosed and renters have
all the perks.
If you are especially interested in math, here's a helpful exercise for you to consider.
http://www.khanacademy.org/video/renting-vs--buying-a-home?playlist=Finance
Lastly, I am here to HELP you, only and always. When we make plans and advice on financial decisions in your life, it requires taking a holistic view of ALL of the costs.
And that's what we always do. | |
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Hegwood & Associates assist clients with Estate Planning, Wills, Trusts, Pet Trusts, Special Needs Planning, Asset Protection, Elder Law, Veterans Benefits and Probate/Estate Administration in Houston, Texas as well as Webster, League City, Seabrook, Kemah, Pasadena, Friendswood, Dickinson, Bacliff, La Porte and Deer Park in Harris County and Galveston County.
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