Money Rehab with Nicole Lapin - Renting Versus Buying Tug of War

Episode Date: April 21, 2022

The two major paths you can take with your housing are 1) renting or 2) buying. Let’s take this decision to the playground, for a little game of Money Rehab tug of war. Renting and owning are going to go head to head and whichever is the strongest in the category, wins. Let’s play. See omnystudio.com/listener for privacy information.

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are you ready for some money rehab? And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money. Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand.

Nicole Lappin. For the last two years or so, figuring out the best path forward when it comes to housing has been cuckoo bananas, to say the least. I'm not one to beat around the bush, so let's cut straight to the chase. The two major paths you could take for your housing is one, renting, or two, buying. So let's take this decision to the playground, shall we? For a little game of money rehab tug of war. Renting and owning are going to go head to head and whichever is the strongest in the category wins. Let's play. Round one. More flexibility. When you rent a place, you'll make a commitment to stay in the space for the length of your lease term, likely a year. During that year, if you've had a wandering eye, you can trade your rented space for another one when your lease is up. Want to try a new neighborhood?

Sounds good. Need to pick up and move for work? No problemo. On the other hand, when you buy a house, you should really stay put. Some experts say that if you buy a house, you should keep it for at least two years before selling it. I'm more of the mind that if you should dig those roots down, you gotta stay for like 30 years. Afraid of commitment? That's another episode. But renting is probably the better one for you here. Winner, renting. Round two. Decision-making power over your space.

If you own a home, it's yours. Well, it's a little more complicated than that, but we'll get into that in future episodes. But regardless, the house is certainly yours to spruce up. You can make decisions over how you want to feng shui your space, if you so choose. Want to build an outdoor shower? Do it up. Want to put a bathtub in your living room? You do you. It's bubble time, baby. Whatever your heart desires is yours. When you're a renter, that won't be your experience.

You can't make major changes to your space without getting your landlord's blessing. Sometimes you can't even have the final say on whether you can get a pet or even have guests stay with you. Winner here, buying. Round three, tax perks. The interest you pay on your first mortgage is deductible up to $750,000. That could save you big if you're in a state with high personal income taxes and you're in a higher tax bracket. If you're not, you soon will be. On the flip side, renters usually don't get tax love. Winner here? Buying.

Round four. You want something to show for what you've paid. A really common argument I see for buying houses is having, and I quote, something to show for the money that you've spent on housing. Seriously, look out for this phrasing next time you talk to somebody about buying a house, because it's a soundbite that has really stuck in people's heads. If you sell your house, there's a chance that you will get some money back from the sale, of course. If you rent, when your lease is up, the only thing that you'll get back is your security deposit, hopefully. Because of this, some people think of renting as throwing money down the drain. I've always felt that this

perspective is a bit of a head-scratcher. You wouldn't say that buying food is money down the drain, right? And yet you still buy groceries. I hope. Well, hey, guess what? It costs money to live. There is a cost of living. There are costs associated with a home, no matter what it is. The interest you pay on a mortgage, for instance, is money down the drain. The bank gets that. Yes, there are some tax advantages to paying mortgage interest, as we just discussed. But in the end, there are serious expenses to owning a home that will never, ever come back to you either. Winner? Buying.

With a caveat. Round five. Status quo. I know you're probably expecting me to fillet you if you want to stick with the status quo. But listen, I get it. I really do. It's completely human and normal to want to fit with the status quo. But listen, I get it. I really do. It's completely human and normal to want to fit in with the pack.

If you've had a tumultuous childhood like I did, proving yourself capable of having a normal, happy, healthy home is really important to you. You may crave that white picket fence because you didn't get it as a kid. Listen, I don't think that you should let the impulse to blend in rule your financial life, but it is something to be aware of and honest about. Winner? Fine. Round six. Less responsibility. Owning a home is a whole lot of adulting.

If something goes wrong with the property that you own, not only do you have to pay to get it fixed, but you also have to figure out how the heck to get it fixed. You need to get the right technicians involved and do your research on the best companies to use. You also need to keep a watchful eye on your property for early signs that something might need fixing. When you rent a place, you can dial your landlord to fix all of those things. Plus, if something looks like it will be a problem after your lease is up, it's not your problem. Winner, renting.

Round seven, opportunity costs. This is a biggie that we've recently covered on episode 257. Opportunity costs are what us in the biz call the price of losing out on a financial opportunity. Simple enough, right? When you price of losing out on a financial opportunity. Simple enough, right? When you put a down payment on a house, you're tying up a huge chunk of cash. If you're looking at a $300,000 house and you put 20% down as a down payment, that would be 60 grand. That 60K could be put to work for you in other ways, like in the stock market, ideally making you more money than the

total cost of the house. If you invest that 60K lump sum and it earns the historical rate of return of the stock market, after 30 years, you would have just about $604,000. Unless your $300,000 house doubles in value over the course of your 30-year mortgage, your money has more opportunity to grow in the stock market. Winner here? Renting. Round eight. You have a landlord. This could be a pro or a con depending on your landlord. At best, a landlord is like a fairy godparent who is looking out for your space. You need your walkway to be shoveled. Fairy landlord. You need an appliance repaired. Fairy landlord. On the other hand, you could also have a nightmare of a landlord. One that's mean or invades your privacy or tries to sue you for scratching the

floor. There's also the possibility that your landlord is good people, but you might have to deal with some natural challenges that happen anytime you have to deal with other human beings. In one of my apartments in New York, I had an Orthodox Jewish landlord. I loved him. He was probably the kindest landlord I've ever had, but we operated on very different schedules. I didn't get home from work until late, and my landlord observed the Sabbath. I remember one time my fire alarm went off in the stairwell and I couldn't reach my landlord because it was after sundown on Friday. My lesson was to dust off my Hebrew school day experience

and know my Jewish holiday schedule so I didn't bother him when he was busy and to talk through a plan with him just in case I did need help and he was unavailable. It was a good experience for me to keep a closer track on the Jewish holidays and feel more connected to my family roots, if we want to find the silver lining here. But it was simple proof that it's a lot easier to get a hold of your landlord when you are your own landlord. Winner here? Toss-up? Round nine. You need liquid cash. If you know that you're going to need to put down a big

chunk of money to pay off student loans or send a kid to college or pay for a medical treatment, you'll need liquid cash to help you shoulder the bills that roll in. Houses are very illiquid assets. In other words, it's hard to melt down into cash when you need it most. Think about trying to drink from a frozen water bottle. If you're going to need your money available to you, you shouldn't tie it up in a down payment. Winner here, renting. Round 10. Eviction. While there are rules against landlords evicting tenants willy-nilly, eviction is still a possibility.

When you buy a home, you can only really be kicked out if you stopped paying. For renters, it's a little less clear-cut. Winner here, buying. Round 11. Ownership. Businesses are in part judged by their balance sheet or whether they own more than they owe. People have balance sheets too, and in general have better financial health when they own more than they owe. If you buy a home with every mortgage installment you pay, you're adding more into your own column and subtracting from your O column. When you rent, you don't get any debt added to your O column, but you don't get any fun additions to your own column either. Winner here, buying. Round 12. Fluctuations in cost. If you're renting,

your landlord can decide to raise your rent. Most financial experts will tell you that homeowners don't have to deal with such fluctuations in what they pay, but that's not necessarily true. If you have an adjustable rate mortgage, your mortgage housing payments could get bumped up. Or beyond mortgages, there could be an unexpected increase in property taxes or homeowners insurance premiums. If you're a homeowner, fluctuations in housing prices could work in your favor. If your neighborhood gets a glow up, your house may appreciate in value. If you're renting, a neighborhood makeover could mean that your landlord will try and raise the rent. Boo! But the opposite is also true. In

recessionary times, if you're a homeowner, the value of your house could drop below what you paid for it. While if you're renting, you could negotiate your rent down. Winner? Toss-up. Round 13. You want another stream of income. As I've cautioned before, a house is not a guaranteed income stream, but it's undeniable that you have more options to monetize a house if you own it. If you own a house, you could have the chance to make it a rental property, sell it for a profit, hopefully, or list it on Airbnb. If you're renting a house, your landlord probably won't appreciate you turning your space into a side hustle. Winner, buying. Round 14, privacy. In most rentals, your landlord will be able to access your unit whenever he or she

pleases. There may be something in your lease that stipulates that your landlord needs to give you reasonable notice before just swinging by, but it's hard to forget that someone else has a copy of your keys. When you buy a home, you don't have to worry about someone swinging by, unless of course you invite them over. If you want to work from home naked, you do you, homeowner. Winner, buying. Round 15. You want to hedge against inflation. One of the biggest questions on real estate is whether buying a house is a good hedge against inflation. Inflation is the amount prices go up over the years and what makes movie tickets $15 today when they were only a couple bucks probably in your childhood memory this is a really complicated

question because on one hand home prices historically remain unchanged if adjusted for inflation if you bought a house in 1970 for $50,000 and it's worth $300,000 today, you may think you've made a killing, right? Not so fast. You've made nothing, actually, when adjusted for inflation. You'd basically be breaking even on that 50 grand house. But if you add in repairs, taxes, and other home expenses, you're probably in the hole, actually. Yes, on the surface, it may seem like a simple case of making money by subtracting $50,000 from $300,000 and thinking, you just made $250,000. But if making money were that simple, everyone would do it. On the other hand, if you buy a house now and lock in a monthly rate that you'll be paying for the next 30 years, you can potentially

shield yourself from rising housing prices as a result of inflation. If you're renting, when it's time for that end-of-the-year conversation on re-upping your lease, your landlord may decide to raise your rent to keep pace with inflation. There's good reason to believe that we're headed for inflationary times. So it is important for us to factor inflation into our financial decision making, but it's unclear how inflation will impact housing prices. What does seem clear is that in buying a house, you're locking in your monthly housing costs, which could be advantageous if inflation tracks up housing costs. But whether inflation will wipe out any possible

gains you'd be getting by reselling that house down the road, that remains a question mark. Winner here, another toss-up. For today's tip, you can take straight to the bank. You want to know who wins the tug-of-war, right? Well, it's not quite that simple. It's not how many wins buying has versus renting. It's how important those points are to you. You may decide that you can compromise on the privacy factor, but because of a life change that's on the horizon, you don't feel comfortable giving up flexibility. Or maybe the opposite.

Let these points act as your guide, but only you can declare the winner of your housing tug of war. Spend my money, money, money. But only you can declare the winner of your housing tug of war. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work,

Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.