The American dream is often associated with homeownership, however it may be much more beneficial for prospective homebuyers to rent. This is mainly due to the flexibility of renting, as well as the "nuisance" factor and unaccounted for expenses inherent in home ownership, according to financial advisors.
Do you have the funds to buy a home? Going through with it may not be the wisest financial move. For many years, Americans have looked at homeownership as a symbol of success. This sentiment still holds strong today - a recent Bankrate poll reveals that 74% of Americans look at owning a house as the epitome of the American dream, more so than other milestones like having a good career, graduating college, becoming a parent, or retiring.Nevertheless, even those who can afford to purchase a home should consider some of the other options. Jude Boudreaux, a senior financial planner at The Planning Center in New Orleans, and a member of CNBC's Financial Advisor Council, believes that individuals should not automatically purchase a house. "You can lead a fulfilled life while renting," he says. There are also several other reasons why it may be smarter to rent a property.
Kamila Elliott, a member of CNBC's Advisor Council and a CFP from Atlanta, recommended that potential homebuyers ponder carefully where they want to live. She suggested asking whether they would still like the city or suburban area, or neighborhood, if they lost their current job. Her conclusion was that if the answer to this is negative, it is better to rent. She also insisted that one must be ready to stay in the area for at least three years in order to buy a house. According to Elliott, who is the Co-founder and CEO of Collective Wealth Partners, "If you can't commit to being there [at least] three years, don't buy."
According to Boudreaux, flexibility is a huge upside to renting, for instance if you just moved to a new city. "It is a great approach when you don't know yet if you like the place," he said. The advantages can be both emotional and monetary. Home prices can be unsteady, meaning purchasing a house and then trying to sell it shortly after is unlikely to bring a return. On top of that, the upfront costs such as paying a realtor's fees often amount to a lot, making it difficult to make a profit when selling shortly after buying.
Advisors noted that there are many lifestyle benefits to renting versus buying. With renting, individuals do not have to manage the "nuisance factor" that comes with making arrangements and payments for landscapers, exterminators, and home repairs, as that is typically handled by the landlord. Elliott remarked that renters can "forget about fixing the dishwasher, garage door, or HVAC unit." Furthermore, depending on the building, renters may be provided with increased security through the presence of security cameras, a doorman, or amenities like a gym or pool. On the other hand, people who are looking for a big yard with a nice garden and space for their pet to play may be better suited to buying a house, according to Boudreaux.
Boudreaux stated that the advantages of holding a residence are "overstated." He advised that buying a house because it is perceived as the expected thing to do can bring about financial repercussions and regret. Advisors explained that an appraisal of affordability is inadequate if buyers just consider the costs of rent and mortgage payments. Reports from Clever Real Estate showed that in 2022, the average homeowner paid more than $15,000 annually beyond their house loan for things such as utilities, renovations, home upkeep, property taxes, and insurance. Additionally, Boudreaux mentioned that the tax break for mortgage interest isn't as profitable as it used to be. The 2017 tax law, initiated during the Trump administration, reduced the amount of mortgage interest that married couples can claim a deduction on; it decreased from $1 million to $750,000.
Overall, claiming a tax deduction for mortgage interest is not as beneficial as it once was due to the laws that have been put in place. Despite this, homeownership can be incredibly beneficial and provides financial security as well as an opportunity to invest and build wealth, as seen in a 2018 paper by Laurie Goodman and Christopher Mayer. However, one's experience in homeownership varies depending on purchase timing, holding period, and location.
Wealth building relies on one's capacity to hang onto a residence during declines; lower-income and minority borrowers are unlikely to do so, and thus profit less from owning a home, Goodman and Mayer stated. In certain cities like Cleveland and Chicago, shareholder returns have been more advantageous than in other major cities including Los Angeles, Dallas and New York. According to a paper published by the Federal Reserve Bank of San Francisco, residential real estate returns and returns of securities have been "very similar and high" worldwide since 1870 up until 2015. Yet in the US, the net return on stocks has been superior to that of housing: 8.3% on average per annum, after adjusting for inflation, according to the paper.
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