Many people equate home ownership with financial success and the American Dream. It’s something most of us in the United States grow up thinking, and it’s something most of us believe we should do. But, owning a home isn’t for everyone, and depending on where you live it could be difficult to achieve. Owning a home isn’t necessarily a good investment either. There’s no one-size-fits all when it comes down to where you want to live and how to best save for your future. I’m a renter as it’s a better financial decision for me, which many of my friends and family have a hard time understanding. I decided to share why I rent and put some comparisons together to help you understand that at the end of the day you have to determine what things are most important to you, in order to determine the best financial path to get there.
The most important thing I can point out from a financial standpoint is that national prices for single family homes have averaged an annual return of 3%. Compare that to the returns of the MSCI ACWI as of 11/30/18, since 12/31/87, at 7.72%. (The MSCI ACWI is an index covering 23 developed countries and 24 emerging market countries.) This isn’t to say that housing markets in certain cities over certain time periods haven’t done just as good, if not better, than global stocks. However, we tend to live based on where our family, friends and job are, not where the best real estate market is or will be. It’s important to ask yourself what you want your future to look like, to help you determine how to best make your money work for you. Are you buying a home because you want to live there for the foreseeable future, or are you trying to maximize your earnings potential? I’d rather invest my extra savings in global stock markets and capture all the compound growth over time. Plus, investing doesn’t require any heavy lifting.
Costs of renting are much more stable than owning. Yes, rents do go up, but there’s more flexibility than you have with owning. For instance, if something goes wrong in a rental the landlord is responsible for fixing it. If something goes wrong in your home, you’re responsible. When it comes to annual maintenance, Zillow and Thumbtack completed an analysis saying those costs amounted to $9,400 a year. If you’re handy and know how to fix things this might not be a concern, but if you don’t know much about fixing things and have to rely on a professional for anything that goes awry the expenses could really add up.
The below charts are to help show the cost savings one could have by renting over 15 years vs owning a home for 15 years. I used the rent I currently pay compared to the sale price of an identical unit in my building. Granted, other factors could impact the results, this is to help show you why it’s a financially beneficial decision for me to rent.
I couldn’t imagine not living in Seattle, but anyone that lives here knows how much the city keeps changing. I like knowing that I could easily move to a different neighborhood or quieter street if I wanted to. A home is not a liquid investment and therefore makes it more difficult to pack up and move if you decide you don’t like the new neighbors or additional traffic. Renting offers more freedom to move at a moment’s notice. However, if you have a family and want to stay put and be in a certain school district this isn’t as much of a concern.
Location and lifestyle preferences are extremely important to me. I want to be able to walk places and to events I enjoy and to my office. You pay more for location, especially in a city like Seattle. Others might have young kids or just want a quiet life, and they would rather live in a large home and commute, than be in the center of it all. This is where you need to consider what you want and what will make you happiest as you can’t put a price tag on that. The financial part will come into play, but you need to know what things are most important to you to help you decide what’s best for you. From there, you can determine what makes the most sense from a financial perspective.
Please reach out to us if you’d like help navigating your financial future, to ensure you’re on the best path to achieve financial success.
Written by: Hannah Ahmed, CFP®, CDFA®
Mortgage rates are from Bankrate: https://bit.ly/2PFCkia
MSCI ACWI Returns: https://www.msci.com/documents/10199/8d97d244-4685-4200-a24c-3e2942e3adeb
Annual Maintenance costs of $9400: https://www.marketwatch.com/story/this-is-how-much-youll-pay-in-hidden-costs-when-you-own-a-home-2018-08-21