Housing

Is Owning a Home Really Different Than Renting?

Many people will lead us to believe that owning is always better than renting.  This seems true on the surface, but there really are not statistics that back this up implicitly.  Rather, at different times in cyclical economic conditions renting and owning can shine at different times.

Property Taxes an obstacle to true Ownership

Many believe that if you can pay off the mortgage then you will be assured of a roof over your head no matter what.  Yet this is not actually a true expectation.  Ownership does not mean you can do anything you want with your property either.  Ownership has drastically changed throughout history.  Even in feudal times land was granted by the king and in return the landholder had to work the land, growing crops to return to the king to continue having use of the land.  In the current system ownership can be thought of as a set of rights.

Government code and policy on property Rights

Many would argue that once you own a  home you can do whatever you like with it.  There are many levels of freedom that you can enjoy and customize your home to your delight, but these actions must fall within the guidelines of the rights you have of use.  There are many things you cannot do without prior approval, permits or fees.  This is due to city zoning laws, city permitting requirements, community CC&R’s, and other ordinances.

Now that we have made the distinction between ownership and right to use let’s look again at the difference between buying real estate and renting.  Almost any form of real estate can be rented so if you buy a single family house, because you don’t want to live in an apartment this is not a great argument as someone can just rent a single family house as well.

A major advantage to renting is having the right to move.  Say a new neighbour moves in next door that you cannot stand, or you have a better job opportunity in another state you can make the move very easily.

Advantages to Owning

  • Emotional satisfaction in pride of ownership
  • Can customize
  • Can save money doing maintenance yourself or defer it altogether if cash is tight
  • Cannot be evicted for no fault of your own as long as you pay mortgage and property taxes
  • Can grow equity in the home in rising markets

Advantages to Renting

  • Can easily move for better job opportunities or if you no longer like the neighbourhood
  • Less money at risk in falling markets
  • No opportunity cost – Can invest in higher yielding assets

 

Owning A Home as a Financial Instrument

The only striking difference between owning real estate and renting is in the term of ownership and cost.  Essentially thinking of housing as a financial instrument.

Earlier I argued that whether you rent or own your home your actual experience does not differ all that much.  Please remember that anything that can be owned can be rented so you must make comparisons between comparable structures only.  IE buying that nice house with the private yard or renting that same exact nice house with a private yard.  Now generally speaking over time it costs more to rent that place than it does to buy.

Opportunity Cost

If you could only keep any extra savings you accumulate in a bank account paying 0% interest I would tend to agree that everyone that possibly can should buy a house right now.  The big advantage to buying is that overtime the principal is being paid down and effectively locks in your housing costs other than property taxes, maintenance, and insurance. A good hedge against inflation is housing costs.  However, that extra savings you have does not only have the alternative option of 0%.  It can go into stocks, bonds, or even real estate that you rent to someone else.

The less you put into your home, the more you have available for other productive assets that will increase your retirement income.  One should question the argument that owning a home is always being better due to its protection from rent increases.  Rather this protection comes at a cost of your initial down payment and annual property taxes.  This same money that could instead earn a return in other investments.

In a simplified example you can put your money in a house and lock in the majority of your right to use costs for life.  Or you can rent a place and own stocks and bonds and use the investment income to pay for rental rate increases.

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