(Republished here with the permission of the National Multi Housing Council)

Rent vs. Buy

“You need to buy a house." How many times have you heard that? Turns out that could be bad advice. Here's why:

Every year, thousands of Americans jump into homeownership for the wrong reason, usually pressure from friends or family. It turns out a lot of them could actually save money by renting.

As the Wall Street Journal wrote in a 2001 article, “Contrary to popular opinion, renting can often be the better alternative, especially if there's a chance you'll stay put less than five years."[1]

This brochure is designed to help you make an educated decision about your housing choice. There are many good reasons to buy a house, but most of them are not financial. The investment potential and the tax savings associated with homeownership are often overstated, while the costs of homeownership are frequently understated.

Instead of feeling pressured to buy, you should choose the housing that best suits your lifestyle. If you value convenience, amenities, flexibility and superior locations, you probably ought to rent. This brochure explains why you can do so with the knowledge that you are not “throwing your money away."

The fastest growing segment of the apartment market is households earning $50,000 or more.[2] What do they know that you don't?

MYTH# 1: I'll reduce my tax bill if I buy a house.

Reality: A majority of owners reap no annual tax benefits from owning a house.

The biggest homeownership myth in the country is that owning a house is a huge tax break. If your mortgage interest and other qualifying expenses aren't more than the standard deduction ($9,500 for joint filers, $4,750 for singles in 2003), there is no tax advantage to owning. That's one reason why only 34% of all taxpayers itemize.[3]

Even if you are able to deduct your mortgage interest and property taxes, remember that depending on your tax bracket, you are still only saving no more than 10 cents to 35 cents in taxes for every dollar you pay in mortgage interest.

Reality Check

Assume you buy a $200,000 house with a 5% down payment at a 6% interest rate. Your total net tax savings, assuming you are in the 28% tax bracket, is a mere $514. That's right. You will be able to deduct $11,336 in mortgage interest, but you would have gotten a $9,500 standard deduction without buying.

So your tax savings are $11,336 minus $9,500 times 28% tax rate, which equals $514. Once you factor in your maintenance and repair expenses, your tax savings could quickly disappear. Maintenance costs often run between 1% and 2% of your house's value annually, depending on the house's age (See Myth# 3).

Assuming a conservative 1% maintenance cost, you may have to spend $2,000 to save $514 in taxes.

Don't Buy the Myths

Once you factor in the standard deduction and maintenance costs, you could end up spending thousands just to save a few hundred dollars in taxes.

MYTH# 2: Paying rent is throwing away money. I could be building equity.

Reality: For the first five years of ownership, you are simply giving away money to the bank.

During the first five years, more than 80% of your monthly mortgage payment is interest. And nearly one third of all homeowners move within five years, before they start building any real equity.

Add in the money they spent during that time on maintenance, taxes, insurance and the costs to buy and sell their house, and most would have saved money by renting.

Reality Check

Assume you buy a $200,000 house with a 5% down payment at a 6% interest rate. After five years of mortgage payments, you will have paid $55,152 in interest and only $13,196 in principal. In addition, you will likely have paid between $10,000 and $20,000 in maintenance and repair (see Myth# 3) to earn that equity.

Chances are you could earn more than this in a number of investments that are more diversified and less risky than putting all of your eggs in one basket

MYTH# 3: My mortgage payment will be less than my rent.

Reality: Your mortgage payment is just the beginning. The “hidden costs" of ownership can add up to thousands of dollars a year.

Few prospective owners truly appreciate how expensive annual maintenance on a house can be. A Wall Street Journal commissioned study concluded that “almost every house, no matter how recently or expertly built, is a money pit.[4] "

On average, you should expect to spend 1% to 2% of your house's value annually on maintenance.[5] For a $200,000 house, that means $2,000 to $4,000 a year for maintenance.

And that doesn't include property taxes, homeowner's insurance or any home improvement, decorating or landscaping you decide to do. Owning also requires a different kind of budgeting discipline. You need to be prepared for the unexpected, like the furnace that needs to be replaced, the roof that needs to be fixed or the leaking basement. Renters, on the other hand, have the convenience of knowing exactly how much their housing is going to cost them each month.

Reality Check

Writing of her experiences as a new homeowner, one columnist said, “Taking care of your humble abode can be so time-consuming that the American dream can turn into a nightmare." “I've been a homeowner for only six months, and already I've spent thousands of dollars beyond my closing costs and down payment…but most of the expenses, unfortunately, I won't ever recoup."[6]

By “renting…we quickly achieved more space, better appliances, better fixtures, better everything…I estimate that by renting, instead of owning, we have more than doubled the value of dollars we spend on housing."[7]

Jonathan Cohen
The New York Times

MYTH# 4: As an owner, my housing costs will stay constant. I won't have to worry about rent increases.

Reality: Only your mortgage payment will remain constant. Other costs can go up every year. And if you have an adjustable rate mortgage, your monthly payment can rise too.

Your mortgage payment is just part of your housing cost as an owner. You also have to factor in the cost of property taxes and homeowners insurance, both of which have been rising significantly in recent years.

Homeowners saw annual property tax hikes averaging 4-5% (for a total increase of 18%) between 1997 and 2001.[8] And homeowners insurance rose 7% in 2003 and is expected to increase another 8% in 2004. Since 1999, average premiums have skyrocketed 26%.[9] And if you have an adjustable-rate mortgage, your costs will rise if interest rates go up.

The Bottom Line

RENTING IS EASIER.

Apartments offer maintenance-free, hassle-free living.

RENTING IS MORE FLEXIBLE.

When you rent, you can relocate for job opportunities without incurring the cost of selling a house.

RENTING IS LESS RISKY.

When you rent, instead of tying all your wealth up in a single investment, you can invest in a variety of stocks, bonds and mutual funds. In fact, you can still invest in real estate through Real Estate Investment Trusts (REIT), either individually or in REIT mutual funds.

APARTMENTS OFFER A LIFESTYLE ALTERNATIVE.

Today's apartments offer amenity packages that rival (and often surpass) single-family houses as well as access to new technologies that may be unaffordable in single-family houses.

Apartments often are located in neighborhoods with convenient access to transportation, employment, retail and entertainment.

RENTING OPENS DOORS

Renting allows you to use your “down payment money" for other investments, to start a small business, to travel, or even to change careers.

“We wanted to be free of the responsibility of a homeowner and to be able to invest all of our money in the business. Apartment living is ideal because it is maintenance-free, convenient and worry-free."

Rose and Gary Trousdale
Sports Management
Business Owners
Phoenix, Arizona
www.naahq.org

Continue on to Don't Buy the Myths: Renting Can be a Smart Decision (part two)

NOTES
1. “Unwise Wisdom: Buying a house is better than renting." The Wall Street Journal, January 29, 2001.
2. NMHC tabulations of 2003 U.S. Census Bureau/Bureau of Labor Statistics Current Population Survey March Supplement.
3. Magali Rheault, “Tax Time: How America Files." Kiplinger's Personal Finance, April 2004.
4. June Fletcher, “Every House is a Money Pit." The Wall Street Journal, September 4, 1998.
5. Liz Pulliam Weston, “The hidden costs of home ownership." MSN Money Web Site. on April 13, 2004. http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37628.asp

6. Ibid.
7. Jonathan Cohen, “The American Dream, Revised as a Rental." The New York Times, July 12, 1995.
8. NMHC tabulations of the U.S. Census Bureau's American Housing Survey for 1997 and 2001.
9. Insurance Information Institute. Found at www.iii.org/media/facts/statsbyissue/homeowners/ on April 14, 2004.
10. Jane Bryant Quinn, “Home Prices Bounce Back: But a third of buyers won't hold their property long enough to make money." Newsweek, March 16, 1998.
11. Jersey Gilbert, “Is Your House Really a Good Investment?" SmartMoney, February 2002.
12. The State of the Nation's Housing 2001. Joint Center for Housing Studies of Harvard University, 2001.
13. Ibid
14. “Rent vs. Buy Calculators: How Helpful Are They?" Research Notes, National Multi Housing Council, June 29, 2001. www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1159&IssueID=80
15. “The High Cost of Short-Term Homeownership." Research Notes, National Multi Housing Council, December 1, 1997.
16. Jersey Gilbert, “Is Your House Really a Good Investment?" SmartMoney, February 2002.
17. Ibid.
18. “Rent vs. Buy Calculators: How Helpful Are They?" Research Notes, National Multi Housing Council, June 29, 2001. www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1159&IssueID=80