Is renting a home right for you?
A growing number of Americans are finding it makes more sense to rent a home than buy it. Is it the right choice for you?
Keith Lane/Special to The Christian Science Monitor
Brian Hollar of Arlington, Va., has never owned a home. That's one big reason, he says, why he's been able to travel extensively, go back to school after more than a decade of work, and not worry about retirement.
For years, Mr. Hollar poured 20 percent of his pretax earnings into his 401(k) because he wasn't burdened by interest payments, property taxes, or maintenance bills. He dared to switch jobs several times to pursue higher pay at little-known, unestablished firms because he had no housing commitment to tie him down. Now his 401(k) is in the six figures, and he's comfortably taking years off to pursue a PhD.
"Renting can be just as financially sound of a decision as owning a home, and in many cases, it's more financially sound," he says.
Hollar belongs to a growing demographic group: renters. Pressed by layoffs and imploding mortgages, home-ownership rates have been dropping steadily since peaking at 69.4 percent in 2004. Today, with ownership rates at 67.2 percent and sliding, the number of tenant families has grown by 3.6 million and represents nearly a third of households.
As renting gets more common, renters and financial advisers are exploring how it can help grow wealth. The key, they say, is to make good use of its flexibility.
One advantage is, in many cases, lower housing costs. New York City money coach Farnoosh Torabi reminds her young adult clients who rent that they're spending hundreds less per month than if their current dwellings were their own. She urges them to save the difference every month. "You're testing your ability to own a home," Ms. Torabi says, "and you're building wealth at the same time, which is good whether you end up buying a home or not."
Saving $3,000 a month in New York
Jack Hough of Queens, N.Y., follows a similar philosophy. An investing columnist for SmartMoney Magazine, Mr. Hough has never owned a home. He pays $2,150 to rent a condominium with parking, granite countertops, and new appliances in a neighborhood 20 minutes from his Manhattan office. Though he could afford to buy a home for his family of three, he'd need to spend an extra $3,000 a month in order to own a comparable home, he says. Instead, Hough steers that money into mutual funds, bond funds, and other securities.
"I'm getting ahead financially by renting," he says. "Being able to afford [a home] and having a good payoff, those are two different things."
Though home prices have dropped in recent years, renting remains a comparatively good deal in many places, according to data from Moody's Analytics. In some cities, such as Honolulu and Cleveland, it's become even cheaper to rent rather than own in the past two years (see chart at left).
Some renters are using their flexibility as a tool for selling high and buying low. Mark Kiesel, a managing director for Pimco in Newport Beach, Calif., anticipated a drop in home prices and has been renting since he sold his home in 2006. He cites multiple factors – high unemployment, tough lending requirements, and large inventories of for-sale homes – as reasons why it's better to be a tenant than a buyer these days. "I believe prices will fall another 10 percent and as such I continue to rent," Mr. Kiesel said in an e-mail. "I likely won't buy until 2011-2012."
Homeownership still has advantages
Financial planners still see value in homeownership. Stephen Lovell, a financial planner and real estate broker in Walnut Creek, Calif., says high-income earners reap big tax benefits by deducting mortgage interest. Homeowners build equity in rising markets. Some also benefit intangibly from the peace of mind and pride of homeownership, he adds.
Homeowners, however, aren't the only ones reaping tax benefits. Renters in certain states qualify for tax credits. Example: Maryland renters who are disabled, low-income, or over age 60 can receive state tax credits worth up to $750.
Financial advisers say would-be renters should weigh various factors. Those who plan to stay put for five or more years and have the means to grab a good deal might be better off buying a home. Those in an overpriced area might do better by renting.
Even advisers who see value in owning also see renting as a savvy strategy in some cases. In July, Mr. Lovell advised a couple on the verge of retiring to consider selling their home and renting, because their income was low and their mortgage interest deductions were nominal. He says they'd do well, as would others who are pinched financially, to boost cash flow by liquidating their home equity.
"If you are trying to optimize the return on your money, I don't think homeownership is a good idea," Lovell said. "It makes sense for emotional reasons and it's not an unreasonable investment, but I wouldn't put it at the top of the list of ways for optimizing money."