When you’re striving for financial independence, does it really make sense to rent instead of owning your own home?
One of the hidden costs of serving your country is relocating all over the world. The moving process is hard enough: my spouse and I have 19 duty stations between us, and we spent more of our careers outside the continental U.S. than in it. However, the military’s frequent moves also effectively prevent most servicemembers from joining the majority of Americans who own their homes.
Homeownership seems even more tempting when you’re at a large duty station and expect to stay there for a follow-on tour. It’s frustrating, too, if you’re giving up your free money housing allowance to enhance your landlord’s lifestyle instead of building your own equity. And when you can get a VA loan to cover the entire purchase price of your own home, then how could you lose?!?
You homeowners– especially you former homeowners– can see how this temptation might affect your ability to make a good decision.
Author Jane Hodges rented happily for a number of years in big cities and small neighborhoods, but she was also attracted to the idea of owning her own property. In 2004 she was swept up in the real-estate frenzy and bought a home in a marginal neighborhood that was already improving. In 2007 she and her new fiancé decided to sell it and buy another home together, so she took out a large home equity loan (on top of her mortgage) for major renovations. Then she put the house on the market.
You’ve heard this story before, right?
Nope– not that story! Actually, their place was only on the market for a week and they sold for a huge profit. They used their new cash stash to buy the home they’re living in today.
Then Jane wrote the book “Rent vs. Own: A Real Estate Reality Check for Navigating Booms, Busts, and Bad Advice“. I’ve spent a decade on Internet forums debating this perennial topic, and this the most thorough and even-handed discussion that I’ve ever seen.
She starts out with a brief description of one homeowner who ended up severely over-leveraged during the 2008-09 Great Recession because her home and her rental properties lost so much value. She also describes how previous generations of Americans used to buy a property, pay off the mortgage as quickly as possible, and live there for decades– even for the rest of their lives.
Owning a home was “The American Dream”, freed you from the landlord’s indentured servitude, and made you a true citizen. You stayed put where you could work the land and decorate your property any way you wanted. It was also a great investment that led to better communities. Your down payment (and years of mortgage payments) kept you from making other stupid mistakes with your money.
Today, of course, people are (re)learning that renting is much less risky than buying, and may even be cheaper. Americans are much more mobile (especially in the military!) so the ownership costs are higher and it takes longer to build up equity. Renting used to imply a lack of commitment, but now ownership exposes families to more expenses than they realized. Singles want flexibility without being tied to a particular job or location, and married people might need a larger place (in a neighborhood with better schools) when they start a family.
Jane goes on to describe the constant tug-of-war between financial logic and emotional rewards– or, as she states it, “investment versus sentiment”. She goes through the calculations that prospective buyers should consider before they buy, and gives you thumbrules to decide whether it’s better to rent or buy. She describes how to be a sustainable housing consumer by renting when properties are expensive, buying when they’re cheap, saving large down payments, and buying less house than you think you can afford. She offers a concrete way to compare renting expenses to owning expenses. (It’s not just “rent checks” against “mortgage payments”.) All of these tactics offer a margin of safety for catastrophic job losses, unexpected recessions, unpredictable mortgage rates, or other volatility in the housing market.
After you’ve read through the first 75 pages of the debate, she shows you how to be ready for both renting and owning. She digs into the details of credit histories, researching properties, down payments, mortgages, agents, negotiations, and even distressed properties. She takes you not just up to the actual closing but through ownership, maintenance, and repairs–all the way to your graceful exit to another home– whether you’re buying again or renting.
In the last chapter, Jane considers some of the fundamental attitude shifts that have happened during the last five years:
- Renting may be better than owning
- The government should offer less support for mortgage lenders
- Ownership tax breaks might be too generous
- Down payments should be higher
- Homes may be too big for affordable ownership
- Total cost of ownership (not just mortgage payments) should be compared to rental costs.
The book is packed with checklists, summaries of pros & cons, questions to consider, and the stories of other renters & homeowners.
If You’re in the Military, Should You Rent or Own?
This book is especially helpful for military families. It will help you think through whether you prefer to live on base (with its advantages and drawbacks) or out in the community (with a different set of pros & cons). It will help you decide whether to use that housing allowance for risk-free rent or for a leveraged ownership opportunity. It will even help you understand the impact of having to move and the possibility that you won’t be able to sell your home.
I wish this book had been out 30 years ago before I blissfully (ignorantly) bought my condo. (We lost money.) I wish it had been there when my spouse and I bought our first home. (We made money.) I wish we’d read it before jumping on the ownership rollercoaster in Hawaii, where we’ve spent over 20 years verifying that homes appreciate at about the rate of inflation– with wild swings in both directions. We haven’t figured out our graceful exit from Hawaii real estate, so I can’t tell you whether it’s better or worse than the stock market.
If you’re in the military, should you ever buy a house? I vote “No” when you’re on active duty because the risks generally outweigh the rewards. You can do much better by renting (and saving more money to invest in other assets) than by owning and hoping for price appreciation (or an extended stint of landlord duty). Even if you’re a dual-military couple with two housing allowances, I think it’s still better to rent (and save and invest) than to buy more house than you really need.
If you’re in the Reserves/National Guard, or if you’re a veteran, then home ownership might be worth the risk. Have a “financial emergency” plan for a possible pay cut when you’re mobilized. Consider how likely you are to move for career, school, or family. Be ready to stay put for a decade or two, and give yourself a margin of safety: buy less house than you can “afford”, and use a large down payment to avoid being trapped upside-down on a mortgage during a recession. Keep a larger emergency fund for home repairs and, if you’re unemployed, for mortgage payments. You might even consider how much it would cost to get the house ready to sell if you’re surprised by a sudden career relocation.
Whether or not you’re in the military, if you feel that you absolutely must exert control over your property then you’ll probably ignore these cautions and plunge into home ownership. In that case I’d refer you to the most excellent advice I’ve ever read, courtesy of Kate Kashman at Paycheck Chronicles: make sure you can afford the entire cost on top of all your other living expenses. If you’re going to be a homeowner (and possibly a landlord without tenants) then make sure you have enough money for the lifestyle. By the way, Kate prefers to own her homes– and she speaks from experience.
Thanks to The Finance Buff for mentioning this book in one of his 2012 posts. When I put a title on my reading list it can take a few months until I actually get it from the library. Then the post goes into the blog’s “draft hopper” until it’s time for yet another book review. “Rent vs. Own” could be in your public library by now, so try there first.