Rent or Buy Your Home?

financial well-being place Oct 14, 2022
rent or buy your home

For generations, living the American Dream has been synonymous with owning your home. This mentality was ushered in at scale during the 1950s when the Federal Housing Authority created attractive financing that led to the suburban housing boom. Today, about 65% of people are homeowners, though this percentage varies considerably by age; less than 40% of adults under 35 are homeowners whereas nearly 80% of people 65 and over own their home.     

At the moment, costs of housing are increasing. With rising interest rates, the financial costs of purchasing a home are climbing and, in markets with appreciating home values, this can translate into owning a smaller home. In Denver, a home buyer on a $3,000 monthly budget can purchase a home of 1,571 square feet, down 19% from 1,933 square feet a year ago. Rents are increasing, too. In fact, rents have been skyrocketing – increasing roughly 20% or more from 2021-2022 in select markets – and recently hit a new high. 

Should you rent or buy?

 

Homeownership percentage by age cohort (Source: Bankrate.com)

 

First Step: What Type of Home is Right for You?

 

Before determining whether it is best to rent or buy, it is important to identify the right home for you. There are lots of housing options: single-family homes, duplexes, apartments, home sharing, cohousing, co-living, co-ops, tiny homes, age-restricted housing and senior living. Such options exist – to varying degrees – within urban, suburban and rural areas and across different parts of the country.

Since where you live is foundational to your overall well-being, it is best to consider how your home will help support your vision for life, including elevating purpose, social connection, and physical well-being – in addition to financial well-being.   

The availability of some housing types may be limited in rental or for sale options. For example, for single-family homes in most suburban and rural markets, options to own are more plentiful than to rent. On the other hand, in certain urban markets, availability of apartments for rent may be greater than those for purchase, particularly at an affordable price point. Your preferred ownership structure may not possible for your desired home and, yet, that may be your best option.  

 

General Pros & Cons of Owning vs Renting

 

Let’s suppose you have narrowed your list for your desired home and find that ownership and rental options are both possible. Further, let’s assume you can afford either option. Below are some generic pros & cons of each option:

 

Pros of Owning:

  1. Can be a vehicle for wealth appreciation and a hard asset than be leveraged
  2. Ability to customize your home as you desire, such as with a remodel
  3. Can provide a sense of emotional security and connection to place
  4. Opportunity for greater social capital, particularly in places where people know each other as homeowners tend to move less

 

Cons of Owning:

  1. It can be more expensive than initially thought, particularly accounting for rising costs of insurance, real estate taxes and home maintenance
  2. Can be difficult/unable to sell your home, especially during market downturns or contracting geographic markets
  3. Home value can go down, possibly below the value of your mortgage
  4. Costs and hassles of home maintenance, such as mowing lawns, repairing appliances, etc.

 

Pros of Renting:

  1. Flexibility – easy to move when desired
  2. Don’t assume downside risk – if the market value goes down, the owner is on the hook, not you
  3. Hassle and costs of home maintenance, such as roof repair and HVAC, are often offloaded to the owner

 

Cons of Renting:

  1. Exposure to increasing rents, triggering a need to move based on affordability concerns
  2. Lower social capital with greater resident turnover – your neighborhood may not be as cohesive with people not staying as long
  3. Limited rights – you may be unable to make significant changes to your home, such as with a remodel

 

 Fractional homeownership is a new trend (Source: NFX)

 

Evolving Housing Ownership Structures and Options

 

It is a period of innovation for housing, including ownership structures. Some investors, such as NFX, a Silicon Valley-based venture capital firm, believe we are entering “Real Estate 3.0” where home ownership models are set for disruption. One approach is to enable rent to own programs. Adam Neumann of WeWork infamy has raised $350M for his new start up, Flow, that seeks to allow renters to build equity while not being tied to the same location. Another approach is to facilitate fractional home ownership. Pacaso is applying this principle to second homes where an owner can purchase 1/8th of a home for use on a fractional basis and Pacaso handles property management eliminating some of the hassle of home ownership.

 

There are blended models, too. One option that is gaining traction is adding an access dwelling unit (ADU) to an existing single family home property. More municipalities are making this possible – or, in some cases, requiring it as part of a need for greater density leading to controversies. These ADUs can be rented out creating a rental stream for existing homeowners and can be a version of home sharing, like Silvernest.

 

One area to watch is the build-for-rent single family home space. After the Great Recession of 2008, a shift began where single-family rental houses started to become more available and were increasingly professionally managed. Today, build-for-rent developers are very active and renting a single-family home is now a viable option in many parts of the country.

 

Special Considerations as We Age, Including Unlocking Greater Financial Security

 

While homeownership has been a proven way to create wealth, owning a house may not be the best option for empty nesters and beyond. Seeing the benefits of renting as mentioned above, an emerging class of people are “renters by choice.” These people could afford to own or have previously owned a home but like the lifestyle benefits of renting.

 

Moreover, renting can create greater financial security. The median older adult homeowner has about half of their net worth tied up in a house. It can be risky to have such a high percentage of assets in an illiquid vehicle. In addition, in general and over a medium period of time or longer, investing in a diversified investment vehicle provides higher returns than a home, particularly if the home is unleveraged. Selling a home and reinvesting those proceeds and then renting a a different home can be a strategy for elevating financial well-being.

 

Rethinking the American Dream: Finding Your Right Place, Right Time

 

For generations, owning a home has been linked to the American Dream and that is a feeling and trend that will likely continue. However, what’s more important is to ensure you are the right place at the right time for each stage of your life’s journey. Insisting on owning a home at each stage limits options and is rarely the right scenario under every condition. Evaluating whether to rent or buy – or some hybrid such as rent-to-own or buy on a fractional basis – will be a key question for many of us over our increasingly long lives.

 

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