Are Many Houses Really Less Expensive to Own Than Rent?

There are plenty of articles in the newspapers these days about how in many areas, it's actually less expensive to own a property than it is to rent one. In fact, just yesterday, The Wall Street Journal had an article about it, titled "As Home Rents Head Higher, Owning Regains Appeal." But as with many issues, the devil is in the details!

Most people think that if the rental rate is above their mortgage payment, then it’s better (hence less expensive) to own than to rent. And while that is somewhat accurate, it's also missing a few important and costly points. To really get the right cost of owning a property, you need to add up all the costs involved, not just the mortgage payment. Those other costs include property taxes, insurance, gardening (which is often paid for by a landlord when you're renting), homeowners association fees, and possibly private mortgage insurance (PMI), water bills (if previously paid by landlord), and repairs and maintenance expenses.

Those costs can add up to a lot of money. In fact, the proper type of insurance can add $50 per month, HOA fees probably add $200-$500 per month, gardening can be $100 per month, water can be $75 per month, property taxes can add 1% to 3% of the property value per year, PMI adds $50 to $80 per month per $100,000 in mortgage borrowing, and repairs and maintenance probably adds $90 to $200 per month. Whew! Unfortunately, you can’t forget about those expenses because when you're an owner and not a renter, you will be the one paying for them.

In addition, as an owner, you need to put away extra monies for capital repairs and replacements, like roofs, kitchen renovations, new flooring, etc., which are all items for which a renter is not responsible. So about every decade or so when a major renovation or replacement is needed, you can easily spend $10,000 on a roof, $20,000 on the kitchen, $7,500 on the bathroom, $2,000 to $4,000 on the flooring, $2,000 on the painting, and the list goes on and on.

Conversely, there are some items that are helpful in the owner’s favor, though. With each mortgage payment you make, you are paying down a little bit of the outstanding balance on the loan, so you are earning equity. You also may have some tax deductions and savings as a result of real estate ownership, though that's not guaranteed. If your house costs around $225,000 or less, and you file taxes as married filing jointly (MFJ), you probably do not really get any tax benefit from owning real estate.

Another benefit to ownership is that your mortgage payment stays constant, while rents typically increase 2% to 3% per year, so you’re winning there too! Lastly, and this is one of the biggest issues on why it could make sense to own real estate, is that it could go up in value over time, which would increase your net wealth simply as a result of being the owner! Many retired people who purchased their houses decades ago have smiles on their faces now, thanks to this phenomenon!

As you can see, you can’t just say it makes better sense to own over renting because the mortgage payment (or even the mortgage payment plus property taxes, plus insurance, plus HOA fees) are less than what it would cost to rent the property. You need to also consider all the costs and long-term renovation issues, plus potential appreciation in value. If you get all those issues sorted out, you can fully understand that it isn’t all that straightforward of an analysis to figure out what is best for you.

But overall, as long as your costs of ownership are not too much above comparable rents, it probably makes good sense to buy property. However, keep in mind that the one way you will most likely not increase your wealth is buying and owning real estate for less than five years. The transaction costs on the buy and sell will eat up all your equity and you’ll be left with the same amount of money, or possibly less money than you started. So go long on real estate ownership or stay a renter until you find a perfect place for you!