Culture of Life
BY Phil Lenahan
February 27-March 12, 2011 Issue | Posted 2/18/11 at 6:38 PM
“Why waste money on renting when you can own instead?” While there is a great deal of truth in that question, there are many situations in which it makes sense to rent. Scripture speaks of taking time to get our affairs in order before making a big commitment to property: “Prepare your work outside; get everything ready for you in the field; and after that build your house” (Proverbs 24:27).
Unless you expect to own a property for a substantial period of time — let’s say five years — it’s a better idea to rent than it is to buy. Why? Because buying and selling property is expensive. Assuming you are financing the purchase, you’ll incur “closing costs” that can easily total 2% of the loan amount. That’s $4,000 on a $200,000 loan.
When you sell the property, you’ll have to pay the real estate agent’s fee, the cost to spruce up the property to make it attractive to a buyer, a homeowner’s warranty policy and other expenses. These can easily come to 8% or more of the sale price. When you include expenses related to both the purchase and sale, this means that a property needs to sell for 10% more than originally paid just to break even.
Real estate investors expect to recover these expenses through a combination of positive cash flow from renting the property and price appreciation that occurs over time. Homeowners depend solely on price appreciation. In the long run, property values historically increase at about the rate of inflation. As a result, you can expect it to take several years to recover the transaction costs related to property ownership.
Another situation in which it makes sense to rent is when you are new to an area. Buying property is a big deal, and you should thoroughly understand the local real estate market before making such a commitment. You’ll want to ask yourself these questions: What are you looking for in a property? Do you want a country or urban lifestyle? How close do you want to be to work and your children’s schools? Can you afford the areas that you find desirable? Don’t forget this includes recurring expenses beyond the monthly payment, such as property taxes, homeowner’s insurance, utilities, repairs and maintenance and landscaping.
Finally, another reason to “bide your time” is that real estate activity is cyclical. If you are in the market for property during a cyclical bubble, it may make sense to wait for the bubble to burst and for prices to soften. On the flip side, if you are in the market after a bubble has already burst, it may prove to be a very good time to make a purchase.
Of course, renting has its own pros and cons, which also need to be considered. But, in many circumstances, renting provides the “breathing space” necessary to make wise real estate investments. God love you!
Phil Lenahan is president of Veritas Financial Ministries and author of
7 Steps to Becoming Financially Free: A Catholic Small Group Study (OSV).
Register for “My Veritas Plan” at VeritasFinancialMinistries.com.
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