Owning a home vs renting

Today’s Millennial generation is, in many aspects, similar to all the generations of Americans who came before them.  After high school, it’s either on to some form of higher education or into the workforce.  Eventually, by their early 20’s the great majority of Millennials are ready to “leave the nest” and find a new place to call home of their own.  Statistically, the great majority of those places have been rentals.  Why? One may ask.  A lot has to do with perception.  Specifically, HOW Millennials view renting vs. buying/owning a home.

In 2019, a whopping 82% of renters nationwide viewed renting as more affordable than homeownership, up 15 points over 2018. That number represents the all-time highest percentage for the survey by Freddie Mac.

You know what they say about people who “assume.”  Just because the perception of the general populace is that renting is the cheaper way to go, it doesn’t mean that it’s correct.  Those choosing to rent solely based on the premise that it’s more affordable are, actually, a little off with their judgment. According to a new report from ATTOM Data Solutions, owning a median-priced, three-bedroom house is actually more affordable than renting a three-bedroom property in roughly 53% of homes in the U.S.  That number increases even more when one eliminates a handful of metropolitan areas.

That means that more than half of the country may be overestimating the cost-effectiveness of renting.

There are distinct notes to pull from this report to have full context. The biggest being that there is a strong correlation between population size and the cost benefits to homeownership.  In other words, the areas where renting may be advantageous tend to be in highly desirable urban metropolitan areas.  These also happen to make up much of the most expensive geographical areas in the country to reside.  It’s also where one would find two factors that affect these findings: rent control and significant short-term property appreciation.  These two influences explain why owning in these specific areas may cost more than renting there on average.

The study also found that:

  • Renting is more affordable in 84% of counties that have a population of 1+ million people.
  • That being said, only 1.5% of the counties in the U.S. have a population more than one million.
  • So, what about the 98.5% of the rest of the country? In general, renting is MORE expensive than owning in these locations.

The instances where homeownership is cheaper than renting, on average, are in lightly populated areas, which bodes well for the area that we live and that you service – Ohio.

In Ohio, there are only two counties that have a population of more than one million residents (Franklin County: ~1.26 million and Cuyahoga County: ~1.25 million), and only three counties with populations between 500.000 and one million (Hamilton County: ~800,000; Summit County: ~540,000; Montgomery County: ~535,000).

That means only 5.7% of the counties in Ohio could be considered, “highly populated,” leaving the remaining 94.3% of counties to be designated “lightly populated.”

While there will always be exceptions in the market, according to the trends outlined in the ATTOM study, Ohio is ripe with opportunity for residents to get more bang for their buck owning rather than renting.  This makes sense for a ton of reasons.

Why Buying is Better

First, landlords tend to be landlords for the purpose of making money – not losing it.  In a general sense, most rentals have owners who “pass costs” onto their tenants.  Whatever it costs the landlord to own a given property, they hope to receive more in income than what they spend on expenses over the course of time.  So… as things like property taxes go up over time, so do rents to compensate for that.  When renting, one is essentially paying a “middleman” who is the owner of that property rather than paying an institution like a bank via a mortgage directly.  This isn’t the only reason why renting is more expensive than owning.

Another major benefit is Home Equity.

Home Equity

Home equity can be defined as the percentage or dollar amount that an owner actually possesses in their property.  Equity can be computed as:

Home’s value – owner’s debt (mortgage) = owner’s $ of equity

$ equity / (divided) by the home’s value = % equity

i.e.  $100,000 current value – $60,000 left on mortgage = $40,000 equity or 40% equity

Renters cannot build equity in a rental property. Their landlords do.  With homeownership, however, that is not only a possibility, it is almost guaranteed over a longer-period of time.  Equity typically starts as the down payment when purchasing a property.  If a buyer puts $20,000 down on a home, they technically have $20,000 in equity, as that is money that is not owed to a lender.  The amount of down payment can vary greatly depending on the deal and loan type though.  (to see more about why you don’t need $20k to buy a home click here.)  People purchase property with a little as 0% as a down payment or as much as 100% (no loan), and everything in between.

As you own and make monthly mortgage payments, equity builds to much larger than just that original down payment.  If one has an amortized loan, as they make each payment they, in turn, pay more and more of the debt (mortgage) off; thus, increasing the amount (percentage) of the property that they actually “own” outright.

In addition to increasing equity from simple debt reduction, more equity can be gained by the property’s total value increasing.  From a macro-level view, real estate’s value has increased over time.  In some places it does better or worse than others.  The same could be said when analyzing specific years or months versus others.  (2006 – 2010 wasn’t the greatest market for instance.)  In a general sense, however, real estate in the U.S. has historically increased around the same percentage as inflation.  Over time, the value goes up.  Owning your home over the long-run rather than renting becomes a “no-brainer” when one takes this fact into account.   How advantageous can it be?  Well…

For example, a $235k home becomes worth a whopping $762k over 30 years of appreciation at just 4% growth each year!  That’s right around what the average growth in the U.S. has been since the 1960’s.  That is a significant amount of money.

Even for those who may not plan on remaining in the same property for that long of a period, it still may be quite beneficial to choose to buy rather than rent.  A $200k home that an individual owns for just 3 years could see a $24,972 to $31,525 increase in value if it averaged just 4 – 5% increase annually over that same time.  That’s money that could be used to buy another home along with a myriad of other uses.

Would you rather rent and own $0 of a property or pay a similar amount each month and possess quite a bit of equity?

Growing equity is also important because it is looked at as an asset and contributes to one’s personal net worth. It can be used as a financial advantage for a variety of instances, such as improving one’s credit score significantly, purchasing a next home, “cashing out,” or for funding retirement.  These subjects must be left to discuss another day.

Tax Deductions

Tax deductions are yet another major benefit to owning a home versus renting.  Rent payments aren’t tax deductible for the renter. However, homeowners in most cases can take tax deductions on the interest of their personal mortgage as well as property taxes. This alone can save owners thousands of dollars a year compared to renting.  It’s yet another reason why buying beats renting more times than not.

Fixed Payments

Unless in a rent-controlled system (like areas in New York City), where a government program places a limit on the amount a landlord can demand for rent, most renters are not protected from rent increases. And rents do increase.

In fact, in the same ATTOM study, it was found that the average rent rose faster than average wages in 43.3% of the counties surveyed.  Unfortunately, this means that the price of rent was outgaining the increases in income as well as inflation.  Each year when this happens it widens the gap between income and affordability.  If that trend remains over time, less and less people can afford to live and rent in those areas. Just because you can afford to rent in your desired area now, doesn’t mean you’ll be able to afford the exact same place a few years into the future.

With homeownership under a long-term, fixed-rate mortgage, the principal and interest payments never increase.  For example, a $500 a month mortgage payment may have sounded expensive to some 25 years ago, but would you still hold that to be true today? Locking into a fixed payment back then benefits that borrower more now (years later).

With prospects deciding between renting and owning, it’s vital as Realtors® to understand the cost perceptions out there, and be prepared to combat them. If you have a potential homebuyer on the fence, we invite you to share this article with them to help them better understand the benefits of homeownership compared to renting.

We also have a simple online Renting vs. Buying interactive calculator your clients can use.

*Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. Not all borrowers will qualify.

“It’s More Affordable to Buy a Home than Rent One in These Markets.” HousingWire, www.housingwire. com/videos/its-more-affordable-to-buy-a-home-than-rent-one-in-these-markets/.

“Buying Is Still More Affordable than Renting, but Not in the Big City.” HousingWire, 10 Jan. 2020, www.housingwire. com/articles/buying-is-still-more-affordable-than-renting-but-not-in-the-big-city/.

Kenton, Will. “The Lowdown on Rent Control.” Investopedia, Investopedia, 18 Nov. 2019, www.investopedia. com/terms/r/rent-control.asp.