Renting vs Owning: The Pros and Cons
Tenants come and go, that’s a fact of the rental property business. As a landlord it’s your job to do everything you can to ensure that your tenants remain in your units for as long as possible, otherwise you’re not generating any revenue.
One of the reasons that many tenants decide to leave a rental property is because they have decided to buy a home. It’s a dream that many of us aspire towards and shifts in the housing market can make that dream a reality for many people who may not have been able to afford that purchase in the past.
What about those who are not in a position to make that jump from renter to homeowner? Are they worse off or better? It’s true that owning a home builds equity in a valuable asset while renters do not get to enjoy that benefit. On the other hand, renters can enjoy freedom from all of the financial burdens that come with owning. If the air conditioner breaks, a pipe starts to leak, or the roof needs to be repaired, the tenant need not pay for these things. The landlord assumes these costs. Renters have no expectation for paying to maintain the property or submit property tax payments every year. A rent payment is all that is expected.
The differences do not end there. But it does allow us to compare the advantages and disadvantages of owning vs. renting and how, when, and why one is better-suited to someone’s particular situation than the other. For instance, renting may be preferable to owning if that person wants flexibility and doesn’t plan on living in the same place for very long. When someone owns a home, they anticipate living in that residence for the foreseeable future.
As another example, someone’s financial situation may not put them in a position to come up with a significant down payment on a home but they may have enough to submit a security deposit on a rental property they can afford for the next couple of years.
Yes, owning a home is a terrific investment. It’s an asset that will increase over time, but that value is impacted by the real estate market and the economy as a whole. But it’s also vital that the property is properly maintained and any damage or wear and tear is addressed in a timely manner, otherwise that could contribute to the depreciation of the property. The value in a home can rise and fall based upon a variety of things that are often out of the homeowner’s control. That’s why renting may very well be preferable for some individuals until the volatility of their personal situation or the forces outside of their control become far less volatile.
These are important factors to keep in mind when marketing your rental properties to prospective tenants. Placing an emphasis on the advantages of renting, the flexibility, the lack of stress, and the lower costs, among other positive attributes, can be an effective tool for keeping your units occupied for the long-term.
The Financial Costs of Renting vs. Owning
Buying a home comes with a litany of costs that can fluctuate over time. The median price to purchase a home in Los Angeles is around $850,000. That’s nearly $4000 a month for a mortgage payment after submitting a 20% down payment. This doesn’t include the maintenance costs, repair costs, and other bills that are part of homeownership.
If the mortgage is a fixed rate loan, that monthly payment stays the same. But an adjustable rate mortgage could increase that payment from time to time. This makes it tough to budget. Property taxes can also rise as the value of the home increases. That’s more money out of pocket at an unexpected increase.
The median price of rent in Los Angeles is roughly $2,700. That cost is fixed and if it increases the tenant is given advance notice so it’s easier to budget as that date approaches. There are no further costs associated with the residence when you rent. Maintenance and repairs are covered by the landlord.
What about insurance? Homeowners must maintain an active home insurance policy which is intended to cover a wide range of perils and potential risks and costs around $1000 a year or more based on the amount of coverage needed. Tenants can choose to purchase a renter’s insurance policy, and they are not bound to make that purchase. If a tenant elects to do so, the cost may be as low as $100 for the entire year and the policy covers only the tenant’s belongings in the event of loss or damage. The policy does not apply to anything else in the unit.
Even the utility costs of a rental property are far less than those associated with a home. An apartment or townhouse is typically smaller than many single-family homes which means they cost more to heat and cool. Electric bills are often lower when renting an apartment or townhouse because the floor plans are smaller and more compact.
The costs of renting can be far more affordable for an individual who may not be ready or is unwilling to pay the much higher costs of owning a home.
The purchase of a home requires a significant down payment on the cost of the property. This is usually an amount equal to 20% of the price. If we look back at our $850,000 home, that down payment at 20% is $170,000. Yes, that money turns into equity that can grow over time and earn value once all the mortgage payments are complete and the homeowner takes full possession of the property.
But that is a sizable number to reach and it can take someone years to save up to have enough in the bank for the down payment. In the meantime, that individual needs a place to live and they will typically rent a place until they are ready. However, a renter may decide to continue renting because he or she may realize that rent payment alleviates so many other burdens, many of which listed above.
As for a down payment on a rental, there is no such thing obviously. Landlords require only a security deposit that is kept until the tenant moves out. Depending on the condition of the rental property at that time, the security deposit is usually returned to the tenant. Most landlords will ask for a security deposit equal to one month’s rent which, in our example for Los Angeles, is $2,700. That is a far smaller number than $170,000. Even with some landlords who ask for security along with first and last month’s rent at once, that still adds up to $8,100.
This is a much more affordable number for moving into a place to live and provides an easier alternative for living in a safe, comfortable rental.
A good number of rental properties in Los Angeles offer amenities that come with the price of rent for an apartment. These can include a pool, workout equipment or a complete gym, even a rec room with a pool table and maybe some arcade games. Tenants who want to enjoy these perks don’t always need to rent from luxury high-rise buildings either, many of the most popular amenities can be found in smaller, more modest apartment complexes.
But for homeowners, these things can be cost-prohibitive. Putting in a new in-ground pool is a substantial expense and even one or two pieces of fitness equipment can cost thousands if purchased new. Even owners who have purchased a condominium or a townhouse will have to pay Homeowners Association (HOA) fees to enjoy amenities like these. That can be an additional cost of a few thousand dollars a year paid monthly.
When a tenant moves into a rental property, he or she typically signs a one-year lease. In some cases, perhaps after living in the property for a couple years, he or she may choose to sign an extended lease with a landlord where they are locked in for two or even three years at a set rental price that won’t increase until after the second or third year. But these leases are short with an option to sign another when the previous one expires, if the tenant and the landlord mutually agree to do so.
That’s one of the great advantages to renting over owning a home. It gives the individual that flexibility to decide when and where they want to live and when they wish to do it. Life happens, circumstances change, and a tenant may find him or herself in a position where they need to pick up stakes and move to a different city, a different state, perhaps halfway across the world. Renting gives you the freedom to do just that.
Buying a home doesn’t leave one with these options. Yes, a homeowner can certainly go where he or she chooses but if that requires the individual to move, there are many factors to consider. Let’s say the homeowner has a new job in Chicago. The homeowner may need to sell the home. A down housing market could result in the homeowner getting a whole lot less on the sale price than if he or she had waited to sell when prices were higher. Waiting to sell brings more financial burdens as the homeowner will either commute back and forth between the home and Chicago, that means transportation costs on a weekly basis. It may also mean the homeowner has to rent an apartment in Chicago until he or she is able put the home in California on the market and possibly wait a few weeks or even a few months for the property to sell.
Of course, this example doesn’t apply to everyone. Homeowners who are more settled in their lives and careers will typically buy with the expectation of living in the home for the next five to ten years or more. They have established roots in the community and don’t expect their careers to take them some place far away. But for those who are younger and still establishing themselves in their life and career, and maybe plan on having a family some time down the road, renting an apartment may be a much better option than owning a home because it allows for a greater range of freedom to live where life might take them.
Rental properties offer a wide array of benefits that some individuals may find more appealing than homeownership. Property managers have a significant role to play by ensuring the rental units and properties they manage are always a more attractive option for tenants from all walks of life. Finding a good property management company that understands the importance of the rental experience can be tough as today’s tenants are eager to find safe, clean, luxurious properties. The best rental experience is one where the tenant is getting his or her money’s worth every month. Lotus West Properties believes in providing an exceptional rental experience. We feel this is the best and only way to ensure that landlords are enjoying the full revenue from every rental property in their portfolios.