In my last post I reviewed the pros and cons of renting a dwelling. Although you may have bad neighbors or a lazy landlord, the amount of money saved by only paying rent with no maintenance and no expensive mortgage could offset the bad with more money left for personal spending or investing for early retirement.
Home ownership on the other hand might seem to be the ideal choice to the majority, but it too has negative points that might not be apparent until they sneak up on a would-be home owner. In my opinion the number one problem with home ownership is that 99% of new home owners don’t have enough money to buy a home. The only way to afford a house, especially in this day and age, is to get a mortgage from a lender. Depending on mortgage rate and amortization, you could pay two to three times the amount of what you paid for your home in the first place. Bi-weekly payments and putting down extra money will help a lot with the added interest, but it’s still alarming what you end up paying in the end. Having a mortgage means you can’t just up and move. You have to sell your house first, and possibly pay a fee for breaking your mortgage. If interest rates rise up quickly, you can have a nasty surprise when you go to renew your mortgage; just ask any homeowner from the 80’s what that’s like. Along with hefty mortgage payments, there is the lovely bonus of paying property taxes, sewer, water, heating bills, electricity and an ugly word called maintenance. Now depending on where a person is renting, they may never see utility bills because they are included in the rent but I can guarantee the rent is adjusted to cover the costs to the landlord.
Maintaining a house is a lot of work, and over the years wear and tear can end up costing a lot of money unless problems are fixed as they happen. An ignored leaky roof can end up costing thousands of dollars in unseen damage rather than spending a few hundred to have it fixed by a professional when it’s first noticed. That’s why it’s important to have a separate saving account and sock away $100 to $300 each month depending on how old your house is to pay for ongoing maintenance. Houses not only cost money to maintain, but also time. Grass needs to be mowed in the summer, snow shoveled in the winter. Rich people pay others to do that work, but what’s the fun in that? There’s nothing like drinking a cold beer on your freshly cut lawn in the summer time. Shoveling snow in the winter on the other hand just plain sucks, period.
The perks of home ownership vary depending on who you ask, but for me I’ve always aspired to have a house to call my own. Having a mortgage is a major drag, but I imagine once my house is paid off there will be a great feeling of freedom that no renter could ever imagine. With each mortgage payment a home owner builds equity in their property which can be unlocked with a home equity line of credit (HELOC). Using your house as a secure asset, you can get a lower interest line of credit that can be used instead of applying for personal loans. If you have credit card debt, you can pay 3-5% instead of paying 19% on the balance. If you were looking to buy a new car, you could cut a cheque from your line of credit and possibly pay the cash price instead of the bloated finance price. You can also renovate your home using your line of credit and increase your home’s value if you decide to sell.
My personal favorite is using a Heloc as an investing tool. In Canada if you borrow money to invest, you can claim the interest you pay at tax time as long as you keep track of the loan with your statements. You could spend $10,000 on a dividend stock, claim the interest you pay and use your return AND the dividends to pay pay back your loan. Eventually your loan will be paid off and your investment will keep paying you dividends that could pay down your mortgage or any other expenses. This type of investing does have its risk and I don’t advise anyone to try it (if you default you lose your home), but it shows that you can use the equity in your house to invest just as much as a renter can.
Home ownership allows more than non-monetary benefits. You have the freedom to paint and renovate whatever and whenever you want without the landlord’s approval. Renovating helps increase the value of your investment while you create a kitchen you love or build a garage that will be envied by your neighbors. As a home owner you can buy nice, upgraded appliances for your house which sure beats using the avocado green coil top stove and funky banana yellow fridge that some landlords include for renters to use. A home allows you to have a yard for gardens, kids or pets instead of being stuck in an apartment with only a balcony. I’m sure there are many other positives to home ownership that depend on the person, but you get the idea.
There are many pros and cons for renting and home ownership but I keep hearing renters say they pay less money overall. Renters may think they pay less money in the end, but if you consider how long you will have to pay rent for a dwelling it might not seem like such a sweet deal. If a couple who are both 25 buy a house, and they pay it off in 25 years, when they are 50 they will be mortgage free and have lots of disposable income until they move into an old folks home at age 85. If that same couple rented instead, they would have to pay rent for 60 years! As an example, imagine paying $1200 a month for an apartment: