The Great Debate: Owning vs. Renting a Home

There’s truly nothing like the peace of mind you get when you own your own home. However, the decision on whether to own vs. rent isn’t always easy. This article will discuss some of the things you should consider when deciding to buy vs. rent including some financial and non-financial advantages and disadvantages.

The tax code truly favors owners. Whether you own a home, business, stock, etc., Uncle Sam rewards those who own. The decision to buy vs. rent is a heavily debated topic and there is truly no clear-cut winner. Renting is viewed as throwing money away, which is not necessarily true. You must consider the time value of money, which basically means that you can benefit from lower rent payments as well as no down payment. To take advantage of the time value of money, you must invest the difference you would’ve paid in the down payment and higher mortgage payments, which most people don’t do unfortunately (they more than likely spend it).

Some people also find renting to be more advantageous than buying because buying and selling a home can be very stressful and frustrating (I certainly didn’t have fun with the buying process). Overall, you need proper planning and education before making the decision. You should consider the price of the home, the amount of your down payment, current interest rates, the current property tax rate, your income tax bracket, how long you intend to live in the home, and the amount of rent you're currently paying to truly make the right decision. Below are some more advantages and disadvantages of each.

Advantages of Renting: Non-Financial

One of the major non-financial advantages of renting is that it’s easy to change places if you don’t break the lease (Millennials love this advantage). This is good for people who relocate for work often and consistently need a change of scenery. In addition, there’s no need to hire someone to do repairs because you can simply call the landlord to get something fixed. Lastly, there’s no requirement for you to maintain the property since everything is taken care of by the landlord and no fees apply as long as you’re not damaging the property (i.e. throwing epic parties every Friday night).

Advantages of Renting: Financial

As discussed before, the time value of money can truly pay off for renters. There’s no need for a down payment, closing costs, and property taxes, although a security deposit is often required. It’s unnecessary to purchase new appliances, perform remodeling, etc. Lastly, you can generally rent for less than the monthly cost of owning a place unless you live in a city like Chicago, where rent prices are through the roof!

Disadvantages of Renting: Financial & Non-Financial

Unfortunately, unlike part of your mortgage payments, rent payments are not tax deductible on your tax return, assuming you don’t use your apartment for business (luckily, you can run a mall from your apartment without physically owning a single product using sites like Shopify and still be able to claim your home office as a legitimate business expense as long as you use it exclusively and regularly for business). If you own a home, your mortgage interest and property taxes are deductible if you itemize (on Form 1040 Schedule A). Also, the effective cost of owning a home may be lower than it appears compared to renting due to the many tax benefits homeowners receive. The wise thing to do is to calculate the after-tax cost of owning vs. renting rather than before-tax (a tax advisor can help you with this through a service known as tax planning).

Advantages of Owning: Non-financial

There’s arguably nothing more like living the “American Dream” than to own your own home. As an African immigrant (now U.S. citizen) living in America, it’s great to know that I own property in the “Land of the Free.” Owning a home truly provides a sense of security. You don’t have to worry about your rich landlord kicking you out. You also won’t have to deal with an increase in rent, although there can be an increase in property taxes and homeowner’s insurance. Luckily, you can appeal your property taxes up to three times a year in Illinois (at least in Cook County).

Advantages of Owning: Financial

The tax benefits of owning a home are quite amazing. The IRS simply wants you to own. Tax laws strongly favor homeowners: mortgage interest and property taxes are tax deductible if you itemize and amounts paid for qualified mortgage insurance may be tax deductible. In addition, there’s the homeowner’s exclusion, which means that if you sell your home and meet certain qualifications, you may exclude up to $250,000 of your capital gain (difference between sale price and cost of the property) from your taxable income. For married couples, the maximum exclusion is $500,000.

Your home also allows you to build wealth in the form of equity. As a homeowner, you can borrow against the equity in your home, using either a second mortgage or a home equity line of credit. The interest on a home equity loan of up to $100,000 is also tax deductible, regardless of how you use the money. Many homeowners use home equity loans to consolidate other high-interest loans, make repairs and improvements to the property, and even fund a child's education! You can truly leverage the loan to build wealth. Lenders will generally allow you to borrow up to 80 to 90 percent of the value of your home.

Lastly, asset appreciation. If the value of your home increases, the profit is all yours when you sell it. You can benefit from the increased value of the entire property, even though you originally only used a small portion of your own money to finance it (in other words, you used the power of Other People’s Money (OPM)). Your home value will more than likely rise over time just like the stock market.

Disadvantages of Owning: Financial & Non-Financial

This section has been omitted simply because the advantages of renting are also the disadvantages of owning, which have been previously discussed in this article.

Conclusion

There are plenty of advantages and disadvantages of owning a home. Some people think renting is a waste of money while others think owning is such a huge commitment. What’s my take? I believe it’s better to own. True wealth is built in ownership. However, the decision to own may not be right for a certain type of person. The choice is yours. If you have any questions, please don’t hesitate to reach out.

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