Conventional wisdom has suggested for years that buying a home is more financially advantageous than renting. Homeownership offers the opportunity to build equity, enjoy a predictable mortgage payment and take advantage of tax incentives, among other benefits.
However, a new analysis of the choice between buying and renting could tip the scales toward the latter in the quest to build wealth, according to a report by Hunter Housing Economics highlighted by Quinn Residences, which develops single-family homes for rent.
The report said that while monthly payments, accumulation of equity and initial cash outflows should be included when considering renting or buying, other factors should also be considered. These include the long-term costs of renting vs. buying over the desired occupancy period and a realistic comparison of probable asset returns over time.
“Our findings suggest home ownership is not always the most viable financial option for many potential or existing homeowners,” said the report. “The primary reasons renting can be superior to homeownership are financial impacts from large initial cash outflows when purchasing a home, the consistent need to incur costly homeowners insurance premiums, property taxes, and maintenance costs.”
In addition to non-recoverable costs associated with purchasing and owning a home, the report highlights the time and energy invested in an owned property. The report outlines a scenario in which a couple looking for a new home could rent a larger property for a smaller monthly payment, no upfront costs, and no ongoing maintenance expenses. Investing these savings into an index fund earning a return of 10% and 12% per year could allow renters to build wealth equal to or greater than they would through ownership. Financial advisors may disagree with this premise.
Another often cited advantage of buying a home is the appreciation of the asset. However, those considering renting vs. owning may overlook that extracting accumulated equity requires transaction costs in the sale of the house. Also, the report acknowledges one distinct advantage of homeownership: the ability to realize tax-free gains on the sale of a primary residence.
Hunter predicted renting could become even more lucrative than owning over the next several years, particularly if mortgage rates remain high and homeowners insurance premiums continue to climb.