Gen X author David Bach created a social-media stir this week when he appeared on CNBC and exhorted millennials to stop wasting their money on rent. In the rent-vs.-own debate, Bach comes down firmly on the side of the traditionalists.
“You can’t get rich renting,” Bach writes in The Automatic Millionaire. “As the old saying goes, landlords get rich and renters stay poor.”
On the other side of the debate are housing experts like George Casey, the head of Stockbridge Associates. He tells The Wall Street Journal that, in the shadow of the Great Recession, the stigma of renting has faded.
“It used to be that if you were an adult and didn’t own your own home, you were kind of a bum,” Casey said — but that image has been “blown into a million pieces.”
In an era of stagnant wages, tepid job growth and soaring student debt, less than 30 percent of 26- to 34-year-olds in Palm Beach County own rather than rent, Trulia says. Nationally, just 35 percent of Americans under age 35 owned their homes in the third quarter of 2016, according to the Census Bureau.
Should you rent or own your home? It’s an age-old question that doesn’t always yield a straight answer.
The unsatisfying advice: It’s complicated. Perhaps the most important factor in the rent-vs-buy calculus is how long you plan to stay in one place.
The five-year rule: In general, housing experts say, if you plan to live in a property for less than five years, you’re wiser to rent. That’s because expenses such as closing costs and real estate commissions wipe out the modest appreciation you enjoy. If you’re going to stay for 10 years, you’ll almost certainly gain by owning. (There are exceptions, of course: Palm Beach County home prices soared so much in the past few years that selling after three years yielded a fat profit. But owners who bought at peak prices 10 years ago are still behind.)
Here’s a partial list of the pros and cons of homeownership:
Pro: A mortgage forces you to save.
When you own a home with a mortgage, you’re essentially paying yourself. After a decade, you’ve built a nice chunk of equity.
Con: You’re responsible for property taxes and insurance.
When you rent, those expenses are part of your monthly payment, and your landlord worries about them. While Florida’s property taxes are modest compared to other states, you can expect to pay about 2 percent of the value of your home every year. Meanwhile, Florida is the nation’s most expensive state for homeowners insurance, and hefty annual increases are part of living in paradise.
Pro: Unlike your rent, your basic mortgage payment won’t go up.
If you take out a fixed-rate mortgage, your principal and interest will stay the same for the life of the loan. Palm Beach County rents, on the other hand, have been rising about 5 percent a year. (If you pay for homeowners insurance through an escrow account, the total amount collected by your lender can and will rise.)
Con: You’re on the hook for repairs.
Kitchens and bathrooms don’t last forever, and a kitchen redo can run into the tens of thousands of dollars. Roofs, windows and air conditioners wear out over time. Replacing them costs thousands of dollars. Appliances break, and you’re on the hook for them, too. If you’re a renter, maintenance is the landlord’s problem.
Pro: Owning gives you stability.
If your kids are in school, or you simply don’t like to move, owning lets you stay as long as you like. If you rent, you occupy the property at the whim of your landlord, who’s under no obligation to keep renewing your lease.
Con: Owning makes you less mobile.
Palm Beach County’s job growth has been lagging Florida’s. And wages here are below paychecks offered in Denver, Dallas, Seattle and Silicon Valley. If you’re tied down by a property here, you might not grab that lucrative job offer somewhere else.
Pro: Owning gives you a few freedoms.
You can have as many dogs, cats and parakeets as you want, paint the living room whatever hue you wish and landscape however you like.
Con: The financial benefits of owning are real, but they’re often overstated.
Bach offers the sobering example of paying $1,500 a month in rent for 30 years. You’ll blow $540,000 with nothing to show for it, he argues. How much will you have if you buy? Here’s a very rough example, with no adjustments for inflation and appreciation: Say you take the same $1,500 a month and apply it to a $250,000 house, with a $200,000 mortgage at 4.25 percent. You’ll spend $984 a month on principal and interest, and the other $516 a month might (or might not) cover property taxes, insurance, lawn care, pest control, the occasional pressure cleaning and those inevitable visits by plumbers, electricians and carpenters. Over the 30-year life of the mortgage, you’ll replace the roof twice, the AC twice, repaint the house three times, buy enough replacement appliances to fill a small warehouse, and you’ll renovate the kitchen and bathrooms, all of which’ll cost you $100,000. And don’t forget that $50,000 down payment you made back when you were young. You will have paid the same $540,000 over 30 years, and you’ll have a net gain of $100,000 to show for it. Not bad, but certainly not hedge fund money.