July 16, 2018
July 16, 2018
At a certain time in your life renting may be the best option. It can be less expensive than homeownership. And it can also provide you with mobility that may be important early in life. But sooner or later, the time will come when renting will no longer makes sense.
Let’s look at the life changes that can cause that shift.
Even though renting is sometimes easier on the budget than owning, it’s not a very good way to build long-term wealth. You’re paying rent to a landlord each and every month, and at the end of the lease term, you have nothing to show for it. It’s simply a monthly expense. There’s no capacity to build up equity in any form.
By contrast, homeownership is one of the most time honored paths to long-term wealth. To be sure, it does have an expense aspect similar to renting. But at the same time, it allows for equity build-up.
This happens in two ways. The first is that the mortgage on the property is paid off over time. Nearly every mortgage issued is self-amortizing, which is to say that you are gradually paying it off through your monthly payments. At the end of the loan term, you own your home free and clear.
But the other factor is home appreciation. Real estate has shown a steady pattern of increases in value, even though the rate at which it appreciates varies from year to year. The combination of the two – mortgage amortization and real estate appreciation – is a surefire way to build wealth while simultaneously providing shelter.
One of the disadvantages of renting is that you miss out on the tax deductibility of real estate taxes and mortgage interest. That’s one of the best deductions available to most middle-class households.
For 2018, the 22% tax bracket begins at $38,700 for individuals, and $77,400 if you’re married filing jointly. These are not extraordinarily high income levels for middle-class taxpayers. If you reach one of these thresholds, having a tax deduction – like mortgage interest and real estate taxes – provides a welcome tax break.
If your income exceeds these thresholds, it will be like the IRS is providing you with a 22% subsidy on your house payment. In addition, most states also provide a tax deduction for homeownership, generally similar to that offered by the IRS. That means that the advantage of the tax deduction will be much higher than 22%.
This is one of the most obvious times when renting no longer makes sense. You not only need more space, but almost certainly you’ll also need one that’s more permanent. This can happen when you get married, have a child, or even when you take on the care of an aging or ailing family member or friend.
That apartment that was so convenient and user-friendly while you were single or a couple without children, suddenly seems cramped and unaccommodating. Purchasing a home becomes a logical step, as you will need more space to accommodate a larger household.
As well, there’s the “putting down roots” factor. This usually becomes more important when a family expands. While you may be perfectly willing to pull up stakes and make a move every few years, a child or an aging family member may need a permanent place to live. Children in particular tend to appreciate the stability that homeownership affords.
We just discussed the need for homeownership when your household expands, but that’s hardly the only reason. Homeownership can enter the picture anytime your life takes on a new direction.
For example, if you were to decide to start your own business, owning a home will generally be preferred to renting an apartment. You can usually do more in a house than you can in an apartment, without worrying about violating the terms of your lease. But you may also need a dedicated business space in your home that an apartment can’t provide.
Self-employment is hardly the only reason. If you decide to take a serious approach to your health, dedicating a space in your home to exercise equipment could become important. That’s simply easier to do in a house than it is an apartment. You can purchase a home that can accommodate a home gym.
Still another is the move toward organic food production. If you own your own home, you can grow a garden in your backyard. That’s about as organic as it gets. You may even decide to try your hand and raising chickens in your backyard, to produce eggs. Both are possibilities if you own your own home, but out of the question if you rent.
Making periodic moves is generally more acceptable early in life. But the time may come when you’ll simply be done moving from one place to another. This will be particularly true if you come to a point in your career where you’re well-established, and likely to remain in your current position for a very long time. At that point, you’ll have no need to move, and may prefer the security of a permanent place to live.
If you have a knack for remodeling, or for doing home renovations, that may also be a driving force. You won’t be able to do either if you live in an apartment. But with your own home, you’d be free to customize the house anyway that you like.
No matter how long you’ve been renting – or how OK you are with it right now – the time will come when renting will no longer make sense. And that’s when it will be time to take the next step – into homeownership.