The American dream: get a good-paying job, settle down with your significant other, and buy a house to raise a family in. Right?
Not so much. Until recently, the majority of Americans felt that they had achieved financial success if they owned a home, could put their children through college, had a secure retirement income, and had upward mobility. However, recent polls and surveys suggest that, for many Americans, homeownership is no longer a core component of the American Dream.
Why is that? Well, partially because of the economic conditions that many Americans continue to face as a result of the 2007-2009 recession, but also because more than 40% of Millennials believe they cannot afford to make a down payment or pay for the costs associated with buying a home, and 47% doubt that their credit is good enough to qualify for a mortgage.
Most Millennials have grown up hearing the sentiment about how renting is simply throwing money away and homeownership needs to happen as soon as possible. With such a majority of Millennials now focusing on renting despite rental rates increasing in most cities, we thought we’d take the other stance to discuss some reasons why renting just might be the right fit for you!
Less to worry and more to enjoy
No more leaky faucets or finding time to mow the lawn. When you rent an apartment or home, the majority of instances simply point to calling the landlord when something goes wrong. Whether the air conditioner takes its last breath, or a pipe bursts, you won’t be stuck paying any outrageous home repair costs and can brush a majority of the standard maintenance tasks like cleaning the gutters or watering the grass off on the staff or landlord.
As if not having to cover home repair costs wasn’t enough, apartment complexes today are starting to offer much more than just a roof over your head. Unless you’re paying millions of dollars for a house, most homes won’t be coming with a gym, swimming pool, or roof top deck for summer BBQ’s. Rental properties (especially in cities or around universities) are getting nicer and nicer, with perks and amenities that typically aren’t feasible for most home buyers.
No equity guarantee when buying
If the boom to bust of 2007 taught us anything, it’s that increasing home prices and equity won’t last forever. Even though owning a property might start out more affordable from a monthly payment standpoint, there’s definitely more to it than that. As a renter, you are not liable for additional costs such as homeowner’s insurance, property taxes, maintenance, and PMI insurance. These expenses add up quickly and ultimately could mean that it’s actually cheaper to rent than to buy in the end.
There are some powerful stories about people who have even become millionaires by switching from homeownership to renting. Adding the total cost of homeownership is very telling and when compared to the total cost of renting, there will most likely be a delta. That additional capital can be put to use as investments that will help grow wealth and put you on track to live a different lifestyle or secure a stable retirement income.
Be more mobile
If you think about it, buying a home is a bit of a gamble. By buying a home, you’re basically saying that you will continue to live in that one place for the next 5-15 years, or more. For those who are constantly on the move or have a high probability of moving because of work or family, homeownership is significantly more risky.
Owning a home might have been more practical for earlier generations because they weren’t as mobile, had significantly fewer jobs during the course of their career, and actually lived in their homes for 20+ years. Millennials could not be more different. Gen Y’s notoriously short attention span has led to the emergence of “Job Hopping” as one of the most prevalent terms associated with Millennials because of their desire to not be in one place for too long. Not surprisingly, that is a major vote in favor of renting as leases can be any duration from a month to 12+ months and technically be broken as desired providing instant flexibility to move onto the next city or apartment.
Renting ≠ “throwing money away”
Although everyone seems to believe the sentiment that renting is always simply throwing money away but you get nothing in return, that’s not necessarily the entire truth. According to Phillips Erb, a tax attorney who rents her home, “people will search two years for a house but one month for an apartment.” Renting is obviously an smaller step than purchasing a home, but that doesn’t mean that it should be rushed into. If you take the time to shop around and even negotiate with property owners, there’s a lot of additional value that can be derived.
That being said, how do you ultimately know if you should financially rent or buy? According to Zillow, follow these steps:
- Calculate the monthly cost of homeownership.
- Calculate the tax benefits of homeownership.
- Subtract the tax benefits from the cost of ownership.
- Compare the after tax cost to market rent for a comparable property.
These calculations will only take a few minutes and will give you an estimate of your rent vs buy situation. Zillow also recommends to calculate the breakeven point – how long it takes for buying to become more financially sound than renting a property. This includes all buying costs such as down payment, mortgage payments, and property taxes. The New York Times also has a great customizable calculator that factors in the most important costs in buying a home while also computing the equivalent monthly rent.
After using these calculations, you’ll have a better idea of whether you should rent or buy. Once you figure that out, start your search to find your next home! We hope this helped shed some light on the benefits of renting and will help you become a much more informed buyer or renter in the months/years ahead.
Until next time…keep it real!