Homeowners vs Renters
Homeowners vs Renters
There has always been an ongoing debate about which is better and less costly: renting property or owning it? At a certain time in life, everyone starts asking themselves this question: is it better to pay a monthly fee to someone so I can have a roof over my head or is it better to pay to own a place? Which costs less? What’s the difference between the two?
This article is here to answer these questions and help you decide whether it’s better to own a place or to rent one – homeowners vs renters.
Let’s start with some hard data: what do the statistics tell us on the matter? Quick research tells us that Americans are renting nowadays more than they have been in any period of time in the last 50 years. One of the reasons why renting is skyrocketing is the Great Recession in 2008 that greatly impacted the housing market. The current homeownership rate is around 64%% and 36.6% of the households rent their property. The rental vacancy rate is 7.2% – in 2018 that rate rose for the first time since 2009, going from 6.9% to 7.2%.
The average renter credit score was 620 in 2017 and the statistics show that it keeps decreasing year after year which makes it even easier and affordable for people to rent property. More than 90% of the cities in the USA have had an increase in the rent recently but real home prices have risen as well, in some markets as much as 6.9%.
The percentage of renters is rising particularly in the Southland cities. From 2006 to 2016, the percentage of renters in Pasadena has risen by 17% – from 49.9 to 58.3. The renting rate has increased even more drastically in Lancaster – by an impressive percentage of 41. In Orange County, renters are nearing a majority as well – by 2016 47.7% of the people living there are renters.
Many brokers tie this trend to the rising home prices which hits the residents with middle-income hard. The housing prices in South California are increasing every year and it’s becoming impossible for many workers to do anything else but to rent. Some people push for rent-control ordinance that would put a cap on the rental increases but this, on the other hand, will demotivate investors who want to build more houses.
And one last comparison: in 2017, 27% of the mortgaged homeowners were cost-burdened, which means that 30% or more of their income was used for the monthly mortgage payment and other housing expenses. This is about 10% lower than the numbers from 2007. The number of cost-burdened renters has risen over the same span of time – from 45.6% in 2007 to 46% in 2017.
Now that we’ve gone over some data and realized both options can be quite costly, it’s time for a more detailed overview of the renters vs owners dilemma.
Making the choice to live in a rented property or to buy the place where you live affects you in many ways. It’s not just a question of “which choice will let me have more money at the end of the month” but also of lifestyle and the amount of longterm savings you can put aside. Many people believe that buying a home is better than renting because they see owning a place as a growing investment, while actually, it would be much better for them financially to live off renting. Other people keep losing money because they would rather enjoy the flexibility and the fact that they have minimum responsibility when they rent property.
However, between the two options (homeowners vs renters) ownership is often seen as the better one. After all, owning property creates a lot of jobs for many people, starting from mortgage lenders to brokers to stores for home improvement, that’s why owning a home has been represented as a key part of living the American dream.
Here’s the thing though: ownership is not universally better and more rewarding than renting. And renting is not always easier and less costly. We’re going to try to give you the pros and cons of both renting and owning here with no bias, so you can figure out objectively which option is better for you.
KEY POINTS: Homeowners vs renters
• PROS of renting: flexibility, calculated and predictable monthly expenses for housing, someone else handles the repairs
• PROS of homeownership: stability, tax deductions, more privacy, equity
• Owning a place doesn’t always mean you’re gaining wealth in the long run and renting doesn’t mean you’re wasting your money
One of the biggest perks about renting is the freedom it gives you. You can literally pack your staff and move without penalty whenever your lease ends. This is a double-edged sword though – you may also have to move out when you don’t want to because the landlord decides to sell the property or turn the complex into condos or just raise your rent a lot.
Another perk of renting is that you know how much you’re going to pay every single month. When it comes house ownership, your expenses might be just regular bills + mortgage but what if the next month you need to change the roof? This is quite costly and might not be covered by insurance. When you’re renting, you never have to worry about this stuff. The roof breaks? Here comes the property manager of your landlord, ready to fix it without taking a single coin from you. Your monthly expenses related to housing, f.e. renter’s insurance, can be completely predictable.
The downside to this is that every time your lease is up for renewal, you may be facing an unpredictable increase in rent which you can’t afford unless you have rent control in your city and your apartment is covered. This makes paying for a house with fixed-rate mortgage payments more predictable but still, you have no way to know if the property taxes and the insurance premiums won’t. In the arguments with or against homeowners vs renters, you might already see who the winner would be.
If you prefer to do with your time as you please and be free to go out or on a short trip whenever you feel like it, if your lifestyle involves a lot of traveling or if you work a lot, homeownership may not be the thing for you. There is always something to take care of in a house – finding the right plumber, matching your schedules, repainting, mowing…Sure, you can pay someone to do this for you, but if you have a landlord, their property manager will be doing all maintenance and repairs for you for free.
Another cool thing about renting is that it usually costs less than buying a home and the payments monthly tend to be lower. Of course, there are always people who say this doesn’t matter because you’re throwing your money away when you’re renting but that’s not true. Everyone needs a place to live and this place costs money, one way or another. You aren’t building equity with your monthly payments of rent, but you’re also not building equity with most of the money you put into buying a house.
Last but not least: renters get no tax break. Many people choose a home mortgage because they can get tax deduction for property taxes and mortgage interest. However, this is misleading. While is it true that the home mortgage interest deduction lowers your expenses early in your loan term and you have your property taxes reduces too when you’re itemizing, that’s not enough of a reason to buy your own house. For every dollar spent, you save 25 cents on your tax bill. You’re not coming out ahead of the game. On top of it all, the decrease in out-of-your-pocket expenses is more palpable only early in your loan term and when you’re paying down your mortgage and the proportion of the payment that covers interest gets smaller, the tax breaks decrease as well.
Renters may get no mortgage tax deduction, but they can use the standard deduction available to all taxpayers.
Among other benefits, homeownership has a lot of intangible ones such as giving you an overall sense of stability and pride, as well as belonging. People are less likely to move when they’ve got a place of their own so they become a part of the homeownership community and develop strong longterm relationships with their neighbors. This can be a good or a bad thing, of course…depending on the neighbors!
Owning a home is not good for everyone. The restless type of people that loves to travel and move and explore a lot won’t be happy to settle down in one place. And selling is not always a profitable option. Homeownership is often presented as a way to build value in the long run but this is not always true. Homes can lose value. The neighborhood where you own a place can decline and its value may decrease. Maybe a major employer will leave the area (a point for renters in the homeowners vs renters) which will cause many people to move away and many houses to be emptied, maybe there will be a boom in residential construction – any of these can bring the prices down. You may lose a significant amount of money if you decide to sell. On top of it all, there are big transaction costs if you sell your house so if you’re likely to change your mind on where you want to live, you should know that this costs a lot more when you own property.
The overall cost of owning a house is higher than the overall cost of renting (a point for renters in the homeowners vs renters) too even if the monthly payment is similar (or even lower) to the monthly rental fee. There are things you need to pay for as a house owner that won’t be your expense if you’re a renter, such as:
• Property taxes.
• Water/sewer service.
• Maintenance and repairs.
• Pest control.
• Tree trimming.
• Trash pickup.
And let’s not forget about mortgage interest! It can make up almost all of your monthly payments in the early years of your mortgage loan. This is inevitable even when the interest is at a very low percentage. Sure, some of the money will be recovered through tax deduction but it will take a lot of time (we’re talking about years here) before more of your monthly payment is going toward principal rather than interest.
Renovation projects often don’t increase the value of the house either. Statistics show that on average you get back only 66 cents for every dollar you spend on home improvement. The only home improvement project that comes close to returning its entire cost is replacing a garage door.
Tax deductions save money, sure, but don’t forget about all the expenses you’ll have for maintenance on your home. An unpredictable long-term financial commitment really isn’t the best option for everyone.
Homeowners insurance vs renters insurance
Before you make up your mind whether to rent or buy a home, you should learn more about the difference between homeowners insurance and renters insurance.
Renters insurance is property insurance that protects the tenant from personal property losses within the rented property. Basically, your personal belongings are not covered by the owners or landlord’s insurance in case something happens to them. If there’s a fire in the house, the structure will be covered by the landlord’s policy but only the renter’s insurance can cover your personal belongings. Without it, the renter is responsible for their losses.
Renters insurance offers three types of protection in general:
• Personal possessions’ coverage.
• Liability protection provides protection against lawsuits for bodily injury or property damage done by the renter or their family or pets. This should also include no-fault medical coverage which allows someone who was injured on the rented property to submit their medical bills to the insurance company.
• ALE (Additional living expenses) protection. This provides protection against some disaster that can make it necessary for you to live somewhere else temporarily and covers your expenses in the temporary home.
There are many additional options, such as whether you want a replacement cost or an actual cash value coverage, if you want to include flood or earthquake coverage or whether you want to add a floater which provides additional coverage for more expensive valuables.
Homeowners insurance covers all of these plus dwelling which is not covered by renters insurance. Dwelling refers to the structure of the house and its insurance covers physical damage to the walls, roofs, floors, etc. However, some perils are normally excluded from the homeowners insurance dwelling coverage, such as floods, earth movements, homeowner neglect, government seizure or demands for rebuilding to match the building codes, war hazards.
The main differences between renters insurance and homeowners insurance are in the cost and that one of them is mandatory and the other is optional.
Homeowners insurance is a lot more expensive than renters insurance because it covers everything the renter’s insurance does plus the cost of the home structure. On average, homeowners insurance costs about five times more than renters insurance.
Homeowners insurance is mandatory in most cases. Sometimes if you own a home outright you can legally not get homeowners insurance, but in most cases, if you’re financing your house with a mortgage, it’s required to have home insurance coverage. As for renters insurance, landlords start increasingly requiring it but still, most of them don’t. It’s generally up to the renter whether they need insurance or not. Renters insurance costs around 10 dollars monthly, so most renters decide it’s worth it.
Bottom line is that there is no universal answer to the renters vs owners dilemma. If you are looking for a property management in Orange County company, we can help out! The answer will determine your personal comfort and your lifestyle so it’s best to ignore all myths about renting and owning a house and focus on the facts. Your situation is special – only you know whether you want to invest in a place to raise children or a residence that is created exactly how you want it to be, or whether you want to live freely and with the ability to easily make a choice to move on to a better alternative.