Monday, October 7, 2013

Renting vs. Buying

I was talking to a client not long ago who was pleasantly surprised when she discovered that her home, which she had lived in for quite some time, was worth quite a bit more in today’s market than she had anticipated. When she shared this with a financial advisor friend of hers he was quick to remind her that she had spent a lot more money living in that house than only what showed up on her mortgage statement each month. Taxes, insurance, repairs and maintenance, when all factored in, he said, wiped out any gains she might have made as the value of her home rose over time. Talk about stealing the ornaments off a person’s Christmas tree. It left her wondering if owning her home was really worth it. Here’s my reply: you’ve got to live somewhere. And you have two choices: rent or buy.

Renting has an advantage. You are much more mobile. If you anticipate that you could be relocating soon or if your lifestyle is such that you know you need the ability to respond quickly to geographical changes, then renting is a good choice for you. If you’re just starting out renting may be your only option for the time being. But understand that just because you’re not responsible for the repairs if something breaks doesn’t mean you’re not paying for them anyway. And the insurance and taxes on the apartment are also factored into your monthly rental payment. And of course there’s the profit margin that the landlord figures in for his trouble. And it’s almost always true that the amount of your rental payment, if paid toward the purchase of a home, will buy you much more room to live in than your apartment. And no one lives on the other side of your wall, your car is in your garage, and you will never find someone else’s underwear in your washing machine.

But let’s go back to the costs. Currently, even though interest rates are rising, it’s still cheaper to buy your home than it is to rent your home in every one of the 100 largest metro areas of the US. And as we even consider this argument in some ways it’s rather comical. Today we’re talking about a national 30-year fixed rate of 4.8%, up from a historic low of 3.5% earlier this year. How quickly we forget that it wasn’t all that long ago that everyone was running to refinance when the rates fell from 7.5% to 5.5%. Personally, my first home loan back in 1979 had an interest rate of 13% (!). Those were the Carter years. We don’t talk about them now. Currently in Tulsa, according to Trulia’s Tara-Nicholle Nelson, the interest rates on a home loan would need to top 15% before renting would be less expensive. Rates are going up. But we can be reasonably sure they’re not going up that much. And what’s interesting about Nelson’s numbers is the fact that even if you don’t itemize your taxes and take your deductions for the interest paid on your home mortgage it’s still cheaper to own than rent by far.

A personal home is the only consumer item you can buy that increases in value over time. The basic reason is simple. We can’t make any more land. But we can make more people. That doesn’t mean there won’t be expenses involved in home ownership. But as I said before, you have to live somewhere. The expenses are going to be there. You should try to recapture as much as you can when you move. Only home ownership allows you to do that.

In the Tulsa area if I can help you buy or sell, please call me at 918-809-5199.

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