Buying Vs Renting a Home: Renting Is Not Throwing Away Money

Does it make sense to house if you intend to move every few years? Has anyone ever told you: “Since you never see rent money again, buying a house is usually the better financial decision.”

Most people do not think about the consequences of when you’re buying a home for a short time (less than 4 years). Just like rent, there is a lot of money going out the door when you own a home that you’ll never see again.

 

Is owning a home a good investment?

Traditionally, owning a home is pitched as a good investment, because you build equity in the home by paying off the mortgage principal. True statement. But consider all the rest of the money you have to shell out along the way to do that:

  • Mortgage interest (this is usually the largest piece of the pie, especially early in the mortgage)
  • Property taxes
  • Home owner’s insurance (HOI)
  • Flood insurance
  • Mortgage insurance (if your downpayment was less than 20%)
  • Maintenance/repairs
  • Condo or HOA fees (for those types of communities)
  • Realtor/lawyer fees when selling (and sometimes buying)
  • Closing costs (buying and selling)

 

Renting versus buying a home costs

In some cases, these can total to be more than what it would cost you to rent a similar place, especially over a short time horizon (less than 4 years). The reason for this is because the interest on the mortgage is the greatest amount when the principal of the mortgage is still high (i.e., early in the mortgage).

Taking a completely arbitrary example (but using realistic numbers), let’s say you can afford a $250K home, you have $25K (10%) to put on the downpayment, with a 30-year fixed rate mortgage at 4.50%. The property tax rate in your area is 2.00%.

If you put that info into a mortgage calculator, it will say your mortgage payment is $1140/month (which includes the interest on the mortgage, plus your principal payment). “Sweet!” you say, because that’s pretty affordable for a $250K home. But wait.

  • Property tax = $4500/year = $375/mo
  • HOI = $87.50/mo (Source: Zillow, $35/mo per $100K of home value)
  • Flood insurance = cost can vary from $0 to a LOT (over $100/mo)
  • Mortgage insurance = $93.75/mo (assuming 0.5% of borrowed amount of $225K)
  • Maintenance/repairs = $2500/year = $208/mo (based on 1% of home’s value to use or save toward repairs)

How much you might spend on realtors, lawyers, and condo fees is completely dependent on the situation, and I won’t swag those numbers here. Hopefully I’m able to make my point without them—just keep those costs in mind if they apply to your situation.

Now, if you total all of that up, what you get is: $1904 and change per month to own. Plus, you’re building equity in the home! All the better. But if you take a closer look at that mortgage payment of $1140, there’s something important. How much interest are you paying versus principal in that $1140?

You can’t quantify this as a set number, because it changes every month. When you make a payment, part of the principal is reduced, so the interest on the principal is less the next month. But you can average it out over set periods of time.

In this example, with your very first $1140 payment you pay $844 in interest and $296 towards equity. Over the first year, you will have made $13,680 in total mortgage payments; $10,050 of that will have been purely interest on the loan. Only $3630 will have been equity in your home. After 4 years, the numbers are $54,720 total, of which $39,170 is interest and $15,550 is equity. In that 4 year span of time, the average amount you paid in mortgage interest per month was $816 ($39,170 divided by 48 months).

So, the final analysis has to be: once I tally all the money that goes out the door when I buy, is it more or less than what I can rent (which is also money out the door)? In this example:

  • 816 (average mortgage interest over 4 years) +
  • 375 (taxes) +
  • 87.50 (HOI) +
  • 93.75 (PMI) +
  • 208 (repairs fund) +
  • Any “other” costs (lawyer, realtor, condo, flood insurance, etc.)

Total = $1580, plus “other” costs. (Yes, I acknowledge some will say $200/mo for repairs is a lot, but you have to budget for repairs somehow, and a good rule of thumb is 1% of the value of the home per year.)

If you can rent a place that fits your needs for $1580 or less, you’re doing better renting the place than you would if you bought the $250K house in this example. You can invest/save what equity you would be building, plus you don’t take on the risk of owning the home (depreciation, unforeseen costs).

Yes, you never see your rent money again, but there’s a ton of money when you own a home that you never see again either. You need to make sure the dead money when owning is less than the dead money when renting. The NYT will help you do the math.

 

Other Reasons to Buy a Home Instead of Renting

I think the issue isn’t that there’s no reason to buy, it’s that a lot of people are under the delusion that you should buy because it’s inherently better financially and renting is somehow not as financially responsible. If you’re buying a house because you want to own a house, rather than because you think you’ll have more money if you own a house, then sure, do it for your own reasons.

Some people may, on the other hand, feel like there’s more value in having a landlord or management company deal with maintenance and emergency repairs for you, having a predictable monthly rent without worrying about surprise fluctuations when you have to deal with house trouble, and the ability to move much more easily. As you said, there are pros and cons to both. But financially, they’re on the whole equivalent, just different. People shouldn’t be pushed away from renting and into buying when they don’t actually prefer to own a house, out of a mistaken belief that that’s the financially better thing to do.

Thinking of a Home as an Investment is a Bad Idea

Thinking of taking a mortgage out on a home (that you plan to live in) as an investment is a very misguided approach to investing. For example, many people buy a more expensive home than they can afford because they see it as a good investment. They can no longer afford to adequately save for retirement, but they believe that their mortgage payments on their house will make up for it. If they take out a 30 year, $250,000 mortgage at 4% APR, they end up paying $429,673 (1,193 monthly) by the maturity of the mortgage. Let’s say the house appreciates in value by 20% over that time and is now worth $300,000, the “investment” you made in your house has yielded you -1.19% annually over that 30 year period. Now let’s say that they decided to instead put those monthly payments into their retirement averaging that same 4% that the mortgage cost you. By the end of the 30 years the value in your retirement would be $828,000. That “investment” that they thought was sound is only worth $300,000 as opposed $828,000 if they would have invested their money and received a modest return.

Theoretically, an investment in a tangible object, such as a house or gold, really only protects you from inflation. Houses have been appreciating in recent years for a couple of reasons. 1.) The low interest rates as a result of the dot.com bubble and the 2008 crisis have made taking out a mortgage much more appealing, thus increasing the demand. 2.) When real estate prices, it actually raises the demand for houses in some cases. People assume that the price will continue to rise and they will be able to make a profit. This same principle works inversely as well. If housing prices are decling, people become less likely to purchase a home for fear that it will continue to decrease in value. We have seen both ways in the past 15 years.

How to Save Money on Car Insurance and Home Insurance

Renters Insurance Can Save Lots of Money

Getting a renter’s insurance policy can save you money on many different things. Renters insurance covers quite a few things, including:

  • Coverage for your personal content, even if it’s not in your home (eg: items in your car. Certain limits apply for traveling and storage).
  • Coverage if you are temporarily displaced,( eg: you need to stay at a hotel while your house is being repaired for smoke damage, money to replace lost clothes, increased food expenses because you’re eating out every day since you don’t have a stove, etc.)
  • Coverage for liability (eg: someone falls in your apartment and breaks their leg, sues you for negligence). I typically see this at 300k
  • Coverage for your defense costs (eg: lawyer fees, small allowance if you need to miss work to attend court hearings, etc.) This is included.

And how much does this coverage cost (including the numbers I used above)? Usually under $200 annually. Further  if you bundle your renters and auto, sometimes the discount on auto will cover the renters (eg:$200 savings on auto, renters cost 150, net savings: 50.) Call your auto insurance, ask if they have renters insurance as well.

 

Why should you get renters insurance?

Why should you get renters insurance? What would a worst case scenario look like? For the lazy, imagine you accidentally start a small house fire while cooking. It damages a few thousand dollars’ worth of your stuff, plus you have to live in a hotel while it’s being repaired, and your landlord is going after you for damages because he has to pay for the repairs. If you don’t have renters insurance, you’ll be paying all of that out of pocket. Oh, but if you DO have renters insurance? You’re paying the deductible (typically 250 or 500), and then letting your claims adjuster deal with everything else. Have to take time off work to go to court to prove you’re not negligent? They have you covered.

 

Higher Insurance Deductibles Will Save You More Money

General rule: Get at least $500 deductible on your auto insurance, preferably $1k. For homeowners insurance, it’s best to go with at LEAST $1k, preferably 2.5k or even 5k. Renters can get away with 250 or 500, honestly.

The difference is usually several hundred a year, and you pay the deductible before the insurance pays anything. For example, let’s say your insurance is $1,500 a year with a $1k deductible, and $900 a year with a$ 2.5k. After 4 years, with a $1k deductible, you’ve paid $6,000 to the insurance company, and then you’ll have to pay another 1k in the event of a claim. After 4 years with a $2.5k deductible, you’ve paid $3,600 to the insurance company, and put aside $2,400 that would have gone to the insurance company, so basically covered your deductible. One more year, you can use the $600 you’ve saved to cover the deductible with $500 additional savings to do whatever you’d like.

 

Insurance should only be used in an emergency/making claims will increase your rates

This is the one that gets people the most. You pay $1,500 a year for insurance, you’ve been paying the last ten years, so why shouldn’t you make a claim when you’ve already paid then $15k? Because it’s going to raise your rates.

Why do insurance rates go up if you make a claim? If you don’t make any insurance claims, the insurance actuaries put in a group, “unlikely to make a claim”. Because you’re in that group, you get more favorable rates. If you make a claim, you automatically switch to a different group, “likely to make a claim.” Because you’re in this group, you’ll get less favorable rates. On auto, it will last for 3 years; on home, five. It doesn’t matter if you haven’t made a claim in your entire life up until this point; as far as the insurance company can see if, you’ve made a claim and will be much more likely to make another.

For example: Let’s say you have a $1k deductible. Someone breaks into your car, steals your purse worth $1,500. Personal property is covered by your home/renters, so if you make a claim your home will pay out $500 (cost of loss-deductible). They now see you as riskier, so they will increase your rates. Maybe $300 a year for the next 5 years; you’ll pay $1500 over the next five years, plus you’ve already paid the $1000 deductible, so now you’ve paid $2500 for a $1500 purse. In this case, it will cost you less to just buy a new purse out of pocket.On the other hand, if you have a kitchen fire that does $30k in damage? Yeah, make a claim on that one.

 

Most vehicles don’t need full insurance coverage

Unless A) Your vehicle is financed, then it’s required by your financing company, or B) Your vehicle is less than 10 years old, then your vehicle will pay out more.

 

Why don’t you need full insurance coverage?

  • Full coverage isn’t an industry regulated term. Professionally, it means nothing. It usually includes collision and comprehensive coverage; some companies will also throw in towing, glass, and rental. If you ask for full coverage, you could be getting anything.
  • Your policy will typically only pay out collision if you’re at fault. If the other driver is at fault, their insurance will pay out. Comprehensive does cover more, so you can get away with having comprehensive (vandalism, theft, tree falls, hit deer) but no collision (you hit object)
  • We will only pay out what the vehicle is worth. Not what it costs to get a new vehicle of this type, not what it costs to get a used vehicle of this type. Doesn’t matter if you paid $35k for the vehicle 10 years ago, doesn’t matter if it costs $15k ro replace it today, we’re only going to pay out the Actual Cash Value, and it typically isn’t 15/35k on a 10 year old vehicle (Much more common is less than 5k)
  • You actually end up paying the company more than it would pay you in the event of a claim, because “full coverage” costs more than liability only.

 

Example of Getting Less Than Full Coverage on Auto Insurance

Let’s say you have a buy a vehicle in 2001 for $20k. ACV is 3k. Your insurance is 1000 liability only, 1500 with collision and comprehensive, with a 1k deductible. Over the course of 4 years here’s what your insurance totals will look like:

 

Liability only coverageFull insurance coverage
1$1,000$1,500 ($500 extra)
2$2,000$3,000 ($1k extra)
3$3,000$4,500 ($1.5k extra)
4$4,000$7,000 ($2k extra).

 

Liability is what you have to pay anyways, so unfortunately there’s not a lot you can do to get around that. For the collision and comp, you’ve paid out 2k extra over the years. If you have an accident right now, the ACV is 3k, minus deductible (in this case 1k). So the most they’ll pay out is 2k, which is the amount you’ve paid them, so you break even. Ever year after that that you don’t have an accident, you’re paying them money that you will never get.

The exact amounts vary, which is why I have the general rules A and B above. If you’re not entirely sure, find out the rough value of what your vehicle is worth. Price liability only coverage (that’s coverage if you hit someone), and liability+ collision and comprehensive coverage (coverage if you hit someone, and also for your own vehicle). Take the rough value of your vehicle, subtract your deductible, this is X. Then take (the price of your quote with collision and comprehensive) and subtract (the price of your quote with liability only). This is Y. X divided by Y is how long it will take you to “break even” if you were to have an accident (although this is obviously not the goal).

42 Things to Consider Before Renting an Apartment List

There are many different things to consider when renting an apartment. If you want to leave the nest on strong footing, there are some important things to consider. Keep in mind that moving out of the house means learning to pay bills on time, and the rent bill should be your highest priority when it comes to spending your money.

What to Consider before renting an Apartment

  1. Check for cell reception.
  2. Inspect tops of cabinets, behind stove/fridge, for poop. If there are red/brown stains in the corners where the ceiling meets the walls, it’s bed bugs. If there is a line of white powder along the baseboards, it can mean roaches, but more likely bedbug treatment has been performed. White powder behind fridge, stove, etc. is usually boric acid or diatomaceous earth used to treat roaches. Brown or tan kernel sized paste is also used against roaches. Check the Bed Bug Registry online and ask if the building has a history of any pest problems.
  3. Inspect drawer under the oven and kitchen drawers.
  4. Check the water pressure on cold, on hot, on both, and how long it takes to get warm.
  5. Bring a socket tester and test all outlets. Also make sure there are enough outlets in each room, and enough 3-prong ones.
  6. Ask the neighbors what the worst part of the building, street, neighborhood is.
  7. Request to see the exact unit you will be moving into, NOT a showcase apartment. If they refuse to at least show you an actual unit, be suspicious.
  8. Check to see if you have a designated parking spot (and assure its cost, if any, is satisfactory). How many visitors can you have at a time & is that enough for you? On a Fri/Sat night, or any other evening/night, are there even any available spots? What happens if someone takes your spot?
  9. Drive through the area during rush hour if commuting via car.
  10. What’s in close walking distance? (food, bars, stores, etc)
  11. If touring multiple units, take pictures of each for later comparison. When you decide on one, time-stamp photograph any damage and make sure landlord is notified of it in writing prior to move-in so you aren’t blamed for it later.
  12. Research state tenant’s rights laws.
  13. Make sure you’re completely clear on all terms of the lease and know what utilities you’ll be paying and what payment method you’ll need to use.
  14. When driving around, take note of what kinds of cars are parked around, and if they’re substantially different from yours, your potential new neighbors lifestyle may differ from your own.
  15. Call a pizza place and see if they deliver there after dark. If not, the place may have a history as being unsafe.
  16. Make sure there’s an Internet provider suitable to your preferences.
  17. An experienced landlord is usually better to deal with than an inexperienced one.
  18. Get an idea of the general price range of utilities such as heat and AC for the unit. Ask neighbors in similar units the general price range for heating/cooling.
  19. Google your potential new landlord. Look up online property records in the county you are in. Slumlords will generally have lots of liens against them and/or have multiple properties in foreclosure.
  20. Assure the windows are double-paned/double-glazed and in good repair if the area is cold to avoid high heating bills. See if the windows open and close easily.
  21. Look up crime statistics for the area and ask the police how often they have been called to the street/complex in the last 6 months.
  22. An apartment with laundry facilities will save you money. If they don’t have them, check the prices/quality of the nearest ones.
  23. www.apartmentratings.com may be a useful resource.
  24. Drive through the area at 10pm one day, 2am the next, and see what kind of activity is occurring, especially on Fri/Sat nights. Walk through the complex around 8pm.
  25. Be wary of any musty smells that could indicate water damage. Too many air fresheners may be an attempt to hide this.
  26. Fill all sinks/tubs. Drain simultaneously and flush each toilet during.
  27. Ask if they accept section 8 or convicted felons, if you care about those things.
  28. Find out who does the maintenance (some handyman, a legit company, the landlord?). What are their policies on work orders? Can they be submitted online? What is their response time guarantee for after hours emergencies? If it’s just a single landlord and not a property management company, do they have someone you can call when they go on vacation and the hot water heater breaks?
  29. Make sure the building managers or owners are local.
  30. When scoping out potential neighborhoods, check out the local grocery stores to get a good sense of the type of people that live in that neighborhood. Also check the closest gas station late at night.
  31. Check your responsibilities as a tenant. After moving in many landlords require you to pay the cost of a stopped up toilet, pest infestations, and require you to shovel snow from sidewalk/mow the grass on areas around the house, or clean gutters. They may also require you to pay the cost to fix supplied appliances.
  32. Dress well, and ask for a discount.
  33. If surrounding places have belongings left sitting on the porches (toys, stoves, seating, decorations), it’s a good sign for little/no theft and a kid-friendly environment.
  34. If the leasing agent or landlord promises to do something before you move in, it needs to be written into the lease or it may not happen.
  35. Assure the unit has adequate storage space for your needs.
  36. 1st floor apartments are most convenient for thieves, and the most frequently broken into.
  37. It’s usually best to avoid living in the same building as your landlord, unless the other tenants vouch for them.
  38. If there’s a homeowner’s association, find out its rules.
  39. Find out the policy on smoking, pets, noise, and visitors.
  40. If you must break the lease, what are the consequences/options?
  41. What’s the average rental time for apartments in the building? If people aren’t staying long, it’s a bad sign.
  42. Try to get a look at as many different options in the area as possible so you can see if what they’re offering is competitively priced for the size/type of unit you’re seeking.

When hunting for an apartment, many renters fall into the same ugly trap: They get swept away with visions of painting the walls deep purple and having cocktail parties every night, while completely ignoring the particulars like landlord rules and fees that come back to seriously bite. So before you sign your lease, WAIT. Take time to ask yourself and your roommates a series of very important questions, because they will make or break your apartment renting experience… and potentially your bank account.