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Five Reasons to Rent

HOMEOWNERSHIP OFFERS MANY ADVANTAGES, as we detailed in the previous section. But there’s no guarantee you will make money, especially if you own a house for just a few years. Thinking of purchasing a home? Here are five caveats—which may prompt you to continue renting.

First, given the risk of declining property prices, you shouldn’t buy unless you can see staying put for at least five years and preferably seven years or longer. Even now, more than a decade after the real estate market peaked, prices in some places are below the heady levels of mid-2006. While it’s hard to imagine we will suffer another decline of similar magnitude any time soon, a smaller drop is entirely possible.

Second, homes are horribly expensive to buy and especially sell, which is another reason you need a long time horizon. There’s the mortgage-application fee, home inspection, title insurance and legal fees when you buy—and the 5% or 6% real estate brokerage commission and local transfer taxes when you sell. Suppose your home’s price rises a few percentage points a year, but you end up selling after just five or six years. Once you figure in all the costs of buying and selling, you may not make money.

Third, owning a home involves greater hassle, with more bills to pay, maintenance to deal with and repairmen to call. If you’re renting, many of these problems fall on the landlord’s shoulders.

Fourth, homeownership involves hefty ongoing costs. On top of the mortgage payments, you’ll have property taxes, homeowner’s insurance and regular maintenance. Because a home involves high ongoing costs and a high cost to sell, those who need financial flexibility should probably rent. You might use that flexibility to slash your living costs by trading down to a lower-rent place, should your finances take a turn for the worse.

That brings us to the final drawback: If you can’t make the regular payments on your home, your financial life could unravel fast. That’s why, before you buy, it is important to have a strong sense that your job is secure and a backup plan in case you’re wrong. That plan might include not only a healthy emergency fund, but also a list of expenses you’ll eliminate if your income suddenly drops.

Next: Housing Myths

Previous: Five Reasons to Buy

Blogs: Money Pit and To Buy or Not to Buy

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