Enjoying the Ride: Where the heart is…

By Scott Brown EBS CONTRIBUTOR

It’s hard to believe that in the midst of one of the more challenging times in our nation’s history that median home prices in the U.S. just surged to a record high of $330,000. All the while facing the COVID-19 virus and related lockdowns, George Floyd protests and riots, and arguably one of our most divisive political environments and Presidential election cycles. Given this environment, I’d like to “move in” to the rent vs. own debate.

As some great philosopher once said, “Home is where the heart is.” That may be true, but the quote only adds to the complexity of this argument as deciding whether to rent or buy a place in which you live is a major life decision. It affects your lifestyle, your savings decisions, cash flow, flexibility, family traditions, memories, and possibly even your taxes to name a few.  Personal finance is personal to say the least. With that said, fewer financial decisions can have a larger impact on your money than whether or not homeownership is the right thing for you and your loved ones.   

Since the bias is often towards ownership, let’s begin there. Positives to buying include: A forced savings program (monthly mortgage payment), investing in and eventually owning a valuable and likely appreciating asset, tax deductibility of mortgage interest, the pride of ownership (the American Dream), monthly and annual cost predictability (no rent increase or leases that aren’t renewed), and finally, stability (being part of a community with long-lasting relationships, schools for your children, etc.). 

Negatives to buying include one-time, non-equity home ownership costs which can run 6 to 12 or more percent of the home’s value (mortgage origination fees, closing costs, realtor costs). Further negatives include ongoing costs like mortgage interest, homeowners insurance, property taxes, as well as maintenance and repairs. Certain costs are purposely left off here since if you were renting they would likely be passed on to you (utilities, condo or HOA fees, tax increases, and even some maintenance, repairs and improvements).

Perhaps the greatest benefit to renting is flexibility. You have the ability to move each time your lease ends. You can choose to upsize, downsize, urbanize, suburbanize, follow your passions, your career and invest your cost savings however you’d like (rent and invest the difference).  You also have more predictability in your monthly living expenses since you won’t be hit with an unforeseen expense like replacing your roof or a major household appliance.  

Negatives include, no mortgage interest deduction on your taxes, lack of, or at least one less forced savings plan (no equity in your home or appreciation), uncertainty in your living situation knowing that you could be forced to move suddenly. Referring to scenarios such as, if your landlord decides to sell the property, turn your apartment complex into condos or bump your rent up passed what is affordable.

Questions for consideration that may help you decide what route is the best one for you to take include: How long do you plan to live in the home? What is the cost of residential real estate in your desired area? What’s the average annual price increase to residential real estate in your town? Do you have ties to the community? Do those ties outweigh any logical reasoning for you? You must also consider the opportunity costs of things like taxes, insurance, down payment, not having a forced savings plan among other things. 

Contrary to popular belief, renting doesn’t mean you’re “throwing money away” every month, and owning doesn’t always build wealth “in the long run.”  The rent versus own debate will persist, and in my opinion, the answer is extremely personal, circumstantial and at times complex. To quote the great Yogi Berra “When you come to a fork in the road, take it.” Or as for me, if the question is which do you prefer, mountain biking or road biking, my answer is simply, “Yes please!”  

Whether or not you are currently living in your forever home or not, I simply hope you are comfortable with your current living arrangement and are continuing to stay safe during these challenging times. Last but not least, continue to set your sites on your goals and enjoy the ride!

Scott L. Brown is the cofounder and managing principal of Shore to Summit Wealth Management.  His wealth management career spans more than 25 years and he currently works and lives in Bozeman with his wife and two sons.