Owning a home is an American dream, but not many have the luxury to make it into a reality. It’s alarming that almost 80% of renters do not have enough income sources or good credit scores to get a mortgage. But, is it even worth investing your money in buying a house? Or is it better to rent and invest your money in 401(k) plan with a diversified portfolio of stocks for better ROI? Let’s find out.
This post was written by our partners at Self Directed Retirement Plans LLC, a national marketing and financial services company whose purpose is to educate individuals and other professionals about the many benefits contained in the tax code.
Homeowners often think that people, who stay on rent throw their money away. However, that is not true. Just like how a homeowner trades a mortgage payment (plus maintenance, insurance, and tax) for a place to live, a renter trades a rent check for a place to live (minus maintenance, insurance, and tax).
Owning a Home Is More Expensive Than Renting
A house needs repairs and maintenance
Houses are costly to maintain. Although the value of the house increases over a period of time, the appliances in the home do not. That means you have to spend a considerable amount of money on renovation, redecoration, maintenance, repairs, remodeling, landscaping, painting, roofing, and many more things. Home improvements need to be carried out not only to keep the property value up but also to fuel your emotional value. This is why owning a house is more expensive than renting.
A house may give you a low ROI
A lot of people have sold off their houses for a very good resale value. But if you think your primary place of residence is an investment, you are probably wrong. A good well-maintained house in a posh locality may appreciate over a period of time, but when you consider the inflation, property taxes and the interest rate you pay on the mortgage, you may end up with a very low return on your investment. Experts argue that although many homes may appreciate in value over time, so do other investments like a 401(k) plans, stocks or IRAs. You may also fetch a higher return on these investments.
In a survey from the Macarthur Foundation, 61% of respondents believe that renters can be just as successful as homeowners in achieving the American Dream, with or without their own home.
Owning a home is not the only way to acquire wealth. Renters can be wealthy too by investing money where they can get maximum returns. Paying for insurance and property taxes The expenses involved in owning a home may take a lot of new homeowners by surprise. There is the homeowner’s insurance to protect the property from damage in case of fire or vandalism, and there is property tax to be paid every year. The homeowners may have the property in their name, but they need to worry about other costs which the renters don’t need to look into.
After going through homeowners’ long list of expenses, it is quite evident that renting costs are comparatively lower than the costs of owning a home.
Pros of Renting
Renting frees up money to save
By choosing to be a renter over a homeowner, you are actually freeing up your money to invest elsewhere. You can come up with an investment strategy that is aligned with your investment goals and invest your savings into stocks, 401(k) plans or IRAs which can give you a greater return on investment.
It gives you more flexibility
A tenant is free to move anywhere once the lease expires. You can be flexible about where you live, and you can relocate to another city to take up your new job. You or your money isn’t tied up in a house. A survey carried out by mortgage loan company Freddie Mac revealed that 68% of renters agree that renting allows them the flexibility to choose where they want to live. The massive costs involved in buying a home allows less flexibility when you decide to relocate to another city or move to another house.
You can diversify your investments and reduce potential risks
People invest quite a chunk of their savings into buying a home. So, that’s like putting your savings in just a single investment that is your house. But, with renting, you can use your savings across multiple investment products, thereby spreading out or reducing the potential risks involved.
Buying or Renting? How to Decide Which Is Better?
Take your time and weigh the pros and cons of homeownership and renting. Ask yourself a few questions, like “Are you planning to stay at your current place for the next 5 years? Are you in middle of a job change? Are you looking for flexibility and financial growth? Can you afford to make a big single investment?” Once you’ve evaluated your financial standing and your non-financial factors (personal and professional), you’ll be in a better position to make an informed decision whether to buy or rent your home.
If you’re considering buying, we can help.
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