APU Business Original

Smart Personal Finance 101: Buy Your Home, Don’t Rent (Part I)

By Dr. Gary L. Deel
Faculty Director, Wallace E. Boston School of Business

and Dr. Karin Ford-Torres
Faculty Member, Wallace E. Boston School of Business

This is the seventh article in an ongoing series on sound tips for financial security and prosperity. Nothing in these articles is intended as formal legal or financial advice. Readers should consult with an attorney or licensed financial advisor before making any financial decisions.

In the previous installments of the Smart Finance 101 series, we covered credit cards and how to leverage their use to your financial advantage. In this article, we’re going to look at why many people should never rent a home.

Renting versus Buying a Home

Of all the wasteful financial expenditures, renting ranks up there as one of the worst. Renters don’t often think about this fact too deeply, but when you consider the actual cost-benefit assessment, it really is a terrible financial move under the vast majority of circumstances.

When you rent, you are paying for the use of someone else’s apartment, condo or house without any accrual of equity on your part whatsoever. So you pay each month to live in the unit. And whether you stay there one month or 50 years, your ownership interest in the home you’re renting is still exactly the same: zero.

The only real alternative is to buy a home. But many people rent because they’re concerned about the commitments and risks involved in home ownership. In our experience, these concerns are usually largely overblown.

Common Concerns about Home Ownership

First, would-be homebuyers sometimes assume they just can’t afford to buy a home. Paying cash for a home is obviously difficult — most people don’t have several hundred thousand dollars sitting in the bank. Banks offer financing for homes, of course. But what about the down payment? Conventional home loans typically call for 20% or more up front, which can be tens or even hundreds of thousands of dollars.

Fortunately, there are government programs that assist, especially first-time homebuyers, with flexible financing options even if a homebuyer doesn’t have a lot saved up to work with.

For example, the Federal Housing Administration (FHA) coordinates special loan offerings for first-time homebuyers that can enable purchases with low interest rates and as little as a 3% down payment. This can go far to lessen the hardship of coming up with the required down payment on a home.

Additionally, the Department of Veterans Affairs (VA) offers special home loans with favorable terms for servicemembers. This may be an attractive option for veterans and active-duty military personnel and their families.

But what about the monthly payments? Interestingly, renters don’t often realize that a home mortgage payment might be the same or even less than what they’re paying in monthly rent. For example, a loan amount of $250,000 with an interest rate of 4% (totally achievable for buyers with even average credit in today’s market) results in a payment of less than $1,200 per month on a 30-year mortgage.

Even if you add in another few hundred dollars for taxes and insurance, you’re still looking at a monthly payment that is competitive with average rental rates for decent-size condos or single-family homes in most markets. So payments on a home purchase are seldom as unmanageable as prospective buyers assume they might be.

Second, a common concern is that even if the homebuyer has the income and down payment to secure the initial purchase, he might not be able to continue making monthly payments if he loses his job at any point in the future. The bank holding the note (the loan) could foreclose, and the homeowner would be forced out of the house. He might also have to file bankruptcy, and such circumstances would almost certainly damage his credit.

There’s no doubt that this can happen. But are the risks and outcomes really so different from a rental situation? Imagine you’re renting and you lose your job. What happens? You can’t afford your rent any more, so your landlord evicts you. That eviction will likely tarnish your credit, and you may still have to file for bankruptcy regardless. So the end result — including homelessness — is more or less the same as losing a home you own.

Third, some people worry about owning a home because, even if they can afford to make the mortgage payments, they fear they might not be able to handle the other responsibilities that go with home ownership. You must purchase homeowner’s insurance and pay state and sometimes municipal taxes. And if a major fixture goes bad like a refrigerator or a hot water heater, you must pay for the replacement as the owner.

But again, the renter’s situation is not much different. The costs are just indirect. So the landlord pays for insurance and taxes and major repairs. And if the dishwasher goes bad, he might have to replace it.

But he will pass those costs on to the renter in the form of higher rent, along with a healthy profit margin for him (otherwise, why would he rent in the first place?). So renting is actually more costly in the long run as tenants still pay for all the costs of home ownership, just on the back end.

Fourth, some people worry that they might not be happy with a home that they purchase. Or they might want to move to a new area in a few years. But if they buy a home, they’d be locked into a 30-year mortgage, right?

Wrong! Even in the short term, purchasing can be a lot smarter financial decision than renting. We’ll explain how in the next part of this series.

American Public University and American Military University offer academic programs in accounting and finance, which cover important financial discussions in depth. Readers who are considering expanding their knowledge and credentials in this field are encouraged to visit our program pages for more information.

About the Authors

Dr. Gary Deel is a Faculty Director at the Wallace E. Boston School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.

Dr. Karin Ford-Torres is an Associate Professor at the at the Wallace E. Boston School of Business at American Public University. She holds a Ph.D. in Business Administration with a concentration in Advanced Accounting and Financial Management. Karin teaches accounting and finance courses for American Public University, Purdue University Global and Colorado State University-Global. She also has 24 years of banking experience with Bank of America.

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