Don’t Buy a House: 5 Reasons You Should Keep Renting

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Deciding whether to rent or buy is a personal decision. For many, purchasing a house just feels like the next logical step in building your financial life. But there are many hidden reasons to consider continuing to rent instead. That’s why today I want to share with you some reasons why many don’t buy a house and cover five reasons you should consider continuing to rent.

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So, without further ado, let’s jump into reason number one!

1. Buying a House Will Cost More than You Think

If you know any of the basics about how to buy a house, you’ll know that the common wisdom is to save enough money for the down payment. And that’s sound advice. You should save 20% to put towards the down payment on a house.

What this advice fails to consider, however, is the closing costs associated with buying a house. It is not uncommon that the closing costs on a home purchase are 3% of the home value. So that means that you have to save 23% or more for your home purchase.

Here’s the problem, though. That’s about as far as most people think things through. They assume that if they can cover the mortgage payment, they’re in good shape.

However, there are so many hidden costs that most homebuyers fail to consider. Here are a few to consider:

  • Property taxes
  • Insurance
  • Maintenance & Capital Expenditures
  • Opportunity Cost

I want to walk through each of these quickly.

Cost of Home Ownership

Property Taxes

It’s no surprise that when you buy a home, you’ll owe property taxes. While you may be able to lock in a significant portion of your housing expense (using a fixed-rate mortgage), property taxes remain an uncertain element of your housing expense.

Property taxes can go up 5% or more in any given year (I know because it’s happened to me).

Insurance

Homeowner’s insurance is a lot more expensive than renter’s insurance. It’s an important consideration to factor in when calculating the total cost of homeownership.

Maintenance & Capital Expenditures

Have you ever considered just how much home maintenance will cost? The AC needs to be serviced. A leaking pipe needs to be fixed. The refrigerator needs to be replaced.

The cost of home maintenance is a lot more than you may expect. I tend to break down home maintenance into two categories:  maintenance and capital expenditures. 

Maintenance is what you’d expect. Things like HVAC repairs, plumbing repairs, etc. fall into this category. Capital expenditures are the things you will need to replace after some fixed lifespan. Kitchen appliances, roofs, air conditioners, etc. all only last so long and most homeowners don’t think about these expenses until they happen.

While there is no hard and fast rule (and no perfect rule), plan on 1% of the home value per year for maintenance and capital expenditures. So if you’re buying a $300,000 house, that means you should expect $3,000 per year in maintenance and repairs. $3,000 per year works out to $250/month.

Sound like a lot? That’s because it is. While a roof may not require replacement often, when that expense hits, it’s a lot. 

While there are other costs associated with owning a home, taxes, insurance, and maintenance are some of the major ones to think consider. To figure out what you can afford, add up a prospective mortgage payment, taxes, insurance, and maintenance. If it doesn’t fit into that monthly budget, you’ll need to look for less house.   

Opportunity Cost

Let’s say you plan to buy a $300,000 house and know you’ll need to save a 20% down payment and 3% for closing costs. This means you’ll need to save $69,000 to buy the house.

Now, instead of buying a house, imagine you invested $69,000 at 7% for 30 years. At the end of 30 years, you would have $525,000. There are other considerations, such as whether a mortgage payment would be less than rent. Still, by tying up equity in a house that may only appreciate by 2% per year, you are bearing a significant opportunity cost. That is, you are forfeiting the opportunity to invest your money in an asset that produces a better return than buying a house.

Which brings me to reason number two you should consider renting:   a house is not an investment. 

2. Your House is Not an Investment

Before 2008, you may have heard people raving that houses always go up in value, and thus they make great investments. Spoiler alert:  that is not the case. Homes do not always go up in value. And when they do, it’s usually not by very much.

In fact, since the year 1900, housing values, adjusted for inflation, have gone up by less than 0.4% per year

Yes, it turns out that housing prices have done little more than appreciate at the rate of inflation over the last ~120 years.

Compare this to the S&P 500. Since the creation of the index in 1926, it has returned ~7% per year adjusted for inflation.

Let this sink in for a moment. Housing prices have stayed virtually flat, and a broad index of stocks has returned ~7% per year when adjusted for inflation. If you are buying a house purely because you think it will appreciate:  don’t. Buy an appropriate mix of stocks and bonds instead.

House is not an Investment

A House is Not an Asset

In the immensely popular personal finance book, Rich Dad Poor Dad, he explains that a house is not an asset. 

When I first read the book, I was perplexed as to how this could be correct. But the more I read, the more it started to make sense. A home that you buy for yourself takes money out of your pocket. Your mortgage payment, taxes, insurance, and maintenance. All of these are cash outflows.

Anything that takes money out of your pocket, including a house, is a liability, not an asset. 

Assets, and likewise investments, help put cash into your pocket. If you are looking for an investment, you’re likely not going to find it in your house.

That’s not to say that you can’t make money by buying real estate. You absolutely can, but when buying a house as an investment, you will instead focus on how much cash flow it PRODUCES rather than how much cash it TAKES out of your pocket. 

If you want to invest in real estate, consider investing through a platform like Fundrise to get your feet wet. After you start to understand real estate investing, then you can begin to consider investing directly by purchasing rental properties, flips, etc.

Fundrise

Fundrise is my favorite tool for getting started with real estate investing. It allows you to invest in a diversified portfolio of commercial real estate at low costs and with a great deal of transparency. Check out my full review to see if this tool is right for you!

3. You Don’t Want to Own a House

Next, maybe you simply don’t want to buy a house. And that’s okay. Even though many people feel that buying a home is part of becoming an adult, it doesn’t have to be.

There are lots of good reasons that lead to an aversion to buying. For one, buying a house can be highly unpredictable. Stuff can, and will, break. And when it does, it’s up to you to have it fixed and foot the bill to repay it.

And frankly, this also takes a lot more effort (and money). 

So, if you simply don’t want to buy a house, that’s a good enough reason not to! Don’t feel pressured to do it by family and friends who insist you are throwing money away on rent (which you’re not, by the way).  

4. Limited Flexibility

Next, if buying a house means just one thing, it means settling down and locking yourself into one location. 

While there’s nothing wrong with this, buying a house is a minimum five-year commitment (if you want it to be worth your while). The reality is that a lot can happen over a few years, which may encourage you to move somewhere else. 

When I moved into my home, I was confident I was going to be there for at least five years. I did a whole bunch of work to make it nice (carpet, paint, appliances, etc.), and now I am considering moving somewhere else. While it’s been a great place to live, it’s made me question how to determine readiness to buy a house.

If you rent, on the other hand, it’s a whole lot easier just to pick up and move somewhere else at the end of your lease term.

Stress of Home Ownership

5. The Tax Benefits Aren’t as Good as You Think

Finally, many will tell you that if you don’t buy a house, you’re sacrificing some significant tax benefits.

And homeownership indeed has some tax benefits, namely that you can deduct the cost of mortgage interest and property taxes from your taxable income, resulting in a lower tax bill.

Unfortunately, these tax benefits are overrated. Here’s why.

Let’s imagine for a moment that you are married, and you buy a new house for $300,000. Your mortgage interest at 4% would work out to around $12,000 per year, and let’s also assume you pay $5,000 in property taxes per year.

So, this means you should be able to deduct $17,000 from your taxable. But alas, you can’t!

As of 2021, the standard deduction is $12,550 for single filers and $25,100 for married filers. Because the standard deduction is more than what you’d be able to deduct if you itemized (which you must if you want to get the tax advantages of homeownership), you wouldn’t choose to itemize your return.

So, how much incremental tax benefit are you getting from buying a home? Zip. Nada. Zero.

You only get incremental tax benefits if you itemize your return, and you can take more than the standard deduction on your return. For many taxpayers, itemizing no longer makes sense under the tax reform law passed in recent years.

I am not a tax expert, so be sure to consult with your tax professional when considering the tax benefits of homeownership.  

Why I Bought a House

Admittedly, I am bad at taking my advice. I bought a house shortly after I graduated from college, and while I have loved the home, I am in, in hindsight, I am not sure it was the best financial decision.

I ran the math on buying a house, and I thought it made sense, but early in my career, there were a lot of reasons I maybe should have considered renting.

There is nothing wrong with buying a house, but it’s essential to understand all of the potential implications of doing so.

Don’t Buy a House:  5 Reasons to Consider Renting Instead

Choosing to buy a house is a highly personal decision. If you don’t buy a house, you may face pressure from others as to why you haven’t. But that’s likely because many people don’t consider the all-in cost of home ownership. 

If you are trying to decide whether you should buy a house, remember these top five reasons to consider continuing to rent instead:

1. Buying a House Will Cost More than You Think

2. Your House is Not an Investment

3. You Don’t Want to Buy a House

4. Limited Flexibility

5. The Tax Benefits Aren’t as Good as You Think

Are you looking for more ideas about whether you should rent or buy? Check out this guide on renting vs. buying so you can make the right choice for you! 

Don't Buy a House Pinterest Pin

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