Last Wednesday, as usual, REC posted another tip regarding real estate investment. One of the topics approached was the idea of “don’t pay someone else’s rent, make someone pay you rent”.
Despite this being a legitimate personal perspective, the debate around renting or buying is one of real estate’s biggest questions.
Facts
Firstly, it is crucial to point out some facts that can clarify the readers’ understanding of the subject:
● Historically, it has always been introduced in people’s mindset that they should eventually own a house. For instance, homeownership is seen as one of the main paths to achieving the famous “American Dream”. However, one reason why Renting vs Buying’s topic became so relevant is precisely because this mandatory homeownership idea has been slowly disappearing. As we pointed out in our last Fact publication on Instagram, over 12% of millennial renters plan to always rent;
● Also, in one of our previous Tips, we mentioned the five ongoing expenses of owning (not renting) a property:
Mortgage (principal and interest);
Maintenance;
Homeowners Association or Condominium fee;
Insurance;
Property Tax.
● For most of the population, buying a house implies plunking down life savings to accomplish a required down payment (acquiring a property is not as straightforward as it is usually convened).
Renting
Avoids ongoing property expenses: Despite possibly paying a higher monthly rent than a hypothetical mortgage, the renter has one fixed and specific cost: paying the rent. Instead, owners have not only monthly mortgages but also the previously mentioned ongoing property taxes. Let’s assume a scenario where there is infiltration in the ceiling: if it is your property, you are paying for it (one example of an unexpected expense); if you are renting, the owner is paying for it.
Flexibility: The possibility of regretting choosing a particular place is possible and likely to happen. While for buyers, that might become a life-changing problem, for renters, even if they legally agree to a particular minimum renting period, it will only be a short-term complication. We can clearly identify a difference in the freedom of choice: renters may stay for an extended period at one place, or they can simply jump from one place to another. Moreover, with current globalization, it has become progressively more common for people to work in different cities, even in other countries, throughout their lives. Renting, unlike buying, does not attach households to a specific town because they have their property there.
Investor mentality: It is legitimately valid (but no consensual) to consider real estate a mediocre investment: the average growth in home prices in the last 100 years has been around 4% (indeed, there are examples of significant appreciations, but the majority happened due to external factors, not because of the intrinsic quality of the investment). In contrast, there are other allocations to your money where higher returns can be obtained. For example, the stock market has gone up around 10% in the same period previously considered;
Fewer concerns about the real estate market: On the previous point, we [GR1] explained how, for some people, real estate may be a mediocre investment. Nevertheless, one might not even care about returns, but only about risk. Renting is definitely a less risky investment. Once renting, agents do not have to be concerned about possible crashes in the real estate market.
Buying
Cash Back: When you buy a property with a 30-year mortgage and make monthly payments, you are actually paying for something you will own in the future. Imagine that you are renting precisely the same property for 30 years; all the monthly payments you have made will be worth nothing in the end.
Stability: Another advantage of buying a house is that you already know how much you will pay each month (assuming a fixed interest rate) until the mortgage matures. On the other hand, as we have been assisting these last years, the cost of rent has increased rapidly. Therefore, it is always uncertain how much rent you will be paying in some years. Furthermore, owning a property provides stability in the sense that households can easily define their long-term personal future (for instance, knowing in advance where your kids will grow);
Building equity: Home values have risen and are expected to continue growing in the future, meaning that buying a house can be considered an excellent long-term investment. Please note that for the last 20 years, value of properties has been increasing between 2 - 5 per cent a year, which is above the average inflation. Hence, only by owning a property piece can you expect your equity to increase over the years.
Historically low interest rates: Despite the recent slight increase in interest rates, the argument for buying instead of renting only becomes more robust with the rates currently available. Interest rates can make a huge difference in your monthly payments and can save you thousands of euros in the long-term. Let’s say you want to make a loan of 400 000€ today, with 30 years of maturity and the current interest rate at 3%. If you ask for the exact same loan tomorrow, but with the interest rate at 4%, you will have to pay an extra 60 000€ in interest during the 30 years of your loan. So, taking advantage of the low interest rates can be an excellent opportunity for buying a house.
Add Value: No one is immediately 100% pleased with the house they’re moving into. The difference is any change performed by the owner is value-added to their property, while if renters alter anything the value-added is going to someone else.
Conclusion
The perfect answer is still to be found, and it will always depend on the person’s personal situation and characteristics. While younger people renting might seem the logical solution, it is likely to be an ephemeral opinion based on the life stage. Basically, each individual’s weight of advantages and disadvantages will be defined according to their objectives. Finally, the more likely pattern for future generations will be renting for a certain period while they are still single, entering the labour market and/or don’t have enough savings to comfortably purchase a property and, after that stage, start looking to buy their own house.
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