Note to Readers: This post is the third in an occasional series on personal finance topics that may be useful for a broader audience than The Rational Walk’s typical focus on value investing. Please feel free to pass along a link to this article to clients or associates who may benefit from the material.
The pursuit of the American Dream is one of the common experiences that Americans of all backgrounds have shared for decades. For most Americans, an integral part of the dream involves home ownership. Staking a claim to a piece of real estate can be a very satisfying experience and can help to build strong communities with individuals seeking common goals. However, as we have seen in recent years, home ownership can have its pitfalls for many who are not ready for the responsibility or have unrealistic expectations.
The home ownership rate in 2008 was 67.8%, but in many cases, homeowners purchased their property with small down payments and home price declines quickly resulted in a situation where millions of Americans owe more on their mortgages than their homes are worth. This has caused distress particularly for those who now must move in order to secure scarce jobs but cannot due to an inability to sell their homes for an acceptable price.
The truth is that renting can have many benefits for Americans who are not financially prepared to own a home or have lifestyles that make frequent moves a necessity. Here are a few advantages associated with renting:
- Renters do not face any risk of real estate price declines. The owner of the rental unit may enjoy appreciation of his or her property in the long run but must also accept the risk of a short term decline in value.
- Renters do not have to pay property taxes. Although property owners could expect to pay lower property taxes when home prices decline, this is often not the case. For example, Loudoun County, a suburb in the Washington D.C. area, has increased property tax rates as home values have dropped largely offsetting declines in assessed home values.
- Renters are not responsible for home maintenance. Most first time homeowners underestimate the large costs associated with maintaining even newer homes. The costs can be surprising and substantial.
- Renters enjoy a great deal of flexibility. Once the lease is up, renters are free to move. This can be a major advantage for those who have employment situations that are not certain and may wish to relocate in order to pursue new opportunities. Generally, real estate purchases should be avoided unless the home buyer is reasonably confident that he or she will remain in the home for a minimum of five years.
- Many landlords offer incentives to renters such as one or two months of free rent when signing a one year lease. For those who are just starting out and do not have many possessions, it is possible to save a substantial amount of money by moving frequently to obtain such incentives. Obviously, the cost of a move in time and hassle may outweigh the incentives, but many renters find “incentive shopping” to be attractive.
These are just a few of the advantages renters have compared to home owners. To be sure, home ownership remains very desirable for many Americans. The Federal Tax Code certainly encourages ownership and many communities benefit from the stability. However, those who are not financially secure or require flexibility that precludes a minimum of a five year commitment to a home are better off renting.