There are many questions in life that cannot be resolved, and one of these deals with where you live. Buying versus renting – which is better? It’s not an easy question to answer.
First, you need to consider the price of the home versus the cost of renting, the location where you want to live, how long your commute to work is, will you be close to amenities and entertainment, how much space do you get, is your living area quiet, do you have easy access to public transportation – and that’s just to name a few points! Of course, every person puts their own emphasis on each of these points which will determine the quality of life as they define it.
While quality of life is subjective, there are other issues related to the buying versus renting debate that are not, and one of those issues deals with how buying versus renting play a part in determining your net worth.
What is net worth? Simply put, it is your assets minus your liabilities. Net worth should not be confused with your income, which is how much money you make as opposed to how much you own. Your assets are anything you own that has financial worth and that can be sold. Common assets include stocks, valuable artwork, and yes, your house. Liabilities are anything that you owe, such as credit card debt or car payments – and possibly your house. It may seem like a contradiction, but it isn’t.
Your home purchase requires a huge outlay of cash. In addition to your down payment, you also need to pay for legal fees, closing costs, moving expenses, and possibly other fees. Outside of your down payment, you will have little to no equity in your home, which makes your home more of a liability than an asset. Additionally, buying a home can mean a huge shift, not just in location and space, but in your finances and mindset as well. With the ever-increasing property prices, and their constant maintenance, repairs, renovations, and property tax, renting could seem like the better financial decision. You don’t need a down payment, pay interest, repair or renovate, or account for property taxes as an additional expense. As well, because your space tends to be smaller, you have less furniture to buy, less to clean, utility cost will be lower, and what’s more, you have more options as to location. With all of the money that you do not have to pay when renting, you could theoretically invest that money, easily funding your retirement account. At first glance, it may seem that, in today’s economy, renting is the better way to increase your net worth while still enjoying quality of life.
But the numbers tell a different story.
The theory that renters could save the money that they would have spent on their home for investments doesn’t actually hold true. The savings rate of the average American has been falling steadily, and stands currently at 2%. This fact obviously indicates that many renters are not funding or cannot fund their retirement any better than homeowners. This, in turn, affects their net worth.
On the flip side, every time they make a mortgage payment, homeowners build equity. Although it starts slowly, the end result is what matters. Based on the Federal Reserve Survey of consumer finances, the net worth of homeowners was 36 times that of renters. Additionally, equity in property was a significant proportion in calculating this net worth. While you still need a retirement fund that is far more liquid than that of a property, having equity in any asset increases your net worth.
And don’t forget the long-term function of buying versus renting. Renters will experience a small but gradual increase in their rent. However, with homeowners, that experience is the opposite. Assuming that you make your payments, eventually, your cost of living will decrease. After your home is paid off, you will then have access to more disposable income that you can use for a vacation, new car, as well as upping your retirement contributions and topping up emergency funds.
Before jumping in to home ownership, contact your real estate agent for details about available properties, work with a mortgage lender to get pre-approved, and finally, chat with a financial adviser to crunch numbers about retirement. These pieces of information can help you decide the best course of action and what you can afford.
Because you do need to pay for a space to live, both renting and buying have their advantages and disadvantages. While every person is different, statistics indicate that, in general, home ownership offers the ability to build equity and increase your net worth. It’s the best of all worlds!