The age-old debate of Rent versus Buy for a home is not even up for debate in my mind. I will take owning a home every time over renting because of all the benefits that come along with home ownership like building equity. The last time I checked, rent money buys you nothing and has a 0% ROI. Paying rent money is like using dollar bills to keep a camp fire burning. You will be warm for the time being, but those dollars are gone forever and will never come back.
When I was in graduate school, I was forced to become a renter again. I hated knowing that my rent was paying mortgage for somebody else. The owner hired a property manager that was just awful. He had no idea how to perform any of the home maintenance where I was getting mad at him for the home owner’s sake.
- Me: “The garbage disposal is broken and no longer turns on. Can you send a contractor to replace it?”
- Property Manager: “Uh… did you try unclogging it yourself?”
- Me: “It has nothing to do with a clog. There is no power and I have already tried resetting the circuit breaker on the back of the unit and at the panel.”
- Property Manager: “Huh? Why would there be no power? Are you sure you have it plugged in?”
- Me: “Why would I ever want to unplug it?”
- Property Manager: …. (silence)
If the property was mine, I would have installed a new garbage disposal myself. Instead, I was playing the role of renter so I had to allow the property manager to do his job (very poorly). I started to question why anybody would call this scenario a “benefit of being a renter”. My wife and I were stuck with a clogged kitchen sink for 2-weeks until a plumber was finally hired by the property manager after several follow-up calls from me. I would never put my tenants into a scenario like this which is why I have become so good at DIY after becoming a homeowner. No longer do I need to pay $150 per hour for a plumber or electrician.
In this post, I will discuss some of the benefits of owning a home which include:
- increasing your personal worth
- tax deductions for homeowners
- building your family legacy
- creating rental income
Increasing your Personal Wealth
Life with coronavirus has fostered a unique housing environment that currently benefits people that own homes in terms of building personal wealth. A shortage of homes for sale has created a more competitive environment for bidding. The basic principle of supply and demand is being controlled by homeowners who are choosing to instead hold their properties longer, therefore, causing a shortage of housing supply. In fact, home prices actually rose in the first quarter of 2020 in 96% of U.S. metro markets according to the National Association of Realtors (NAR). This is a radically different environment than during the subprime mortgage crisis when I was able to purchase a foreclosed condominium.
Supply and demand definition provided by Britannica,
Supply and demand, in economics, relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model of price determination used in economic theory. The price of a commodity is determined by the interaction of supply and demand in a market.
https://www.britannica.com/topic/supply-and-demand
Pandemic Real Estate Buying Opportunity
As a result of the supply side being controlled by homeowners, both the Redfin and Zillow estimates for my homes have increased my overall net worth during the COVID-19 shelter-in-place California order. Only time will tell us if this trend continues to hold towards the end of 2020.
The coronavirus outbreak has created many ripples in the global economy. Federal interest rates have fallen back to the lowest level. As a result, mortgage interest rates have also fallen to record lows particularly for the 30-year fixed. I believe there will be buying opportunities in real estate if conditions continue to deteriorate as a result of the shelter-in-place orders. The following scenarios are already happening such as contractors are unable to work, permit inspections are on hold, appraisal visits cannot be completed, open houses will sit empty with no buyers. Homeowner sellers will likely start getting desperate, especially those that may have been impacted by layoffs or furloughs. Even rentals are not safe because mortgage payments still need to be made but renters may not have the money to pay. If enough of these scenarios continue to play out over a longer period of time towards the end of 2020, I believe the asking prices for houses will start to drop. The irony of it all is I never thought we would see another housing opportunity like the subprime mortgage crisis so I hope to be wrong about this.
Related Post: Investing during the Pandemic
Tax Deductions for Homeowners
Owning a home provides some major tax benefits that could allow you to claim itemized deductions that could lower your taxable income. Normally, if the total value of itemized deductions is higher than the standard deduction, you would itemize. Otherwise, you should opt for the standard deduction.
The standard deduction for the 2019 tax year is:
- $24,400 for married couples filing jointly
- $12,200 for single and married individuals filing separately
- $18,350 for unmarried heads of households.
Mortgage Interest Deduction
You can deduct the mortgage interest from your taxable income under itemized deduction. Along with building equity, your mortgage payment includes a portion that goes towards interest from the loan. Usually, your mortgage service provider will send a statement to you that indicates how much interest you paid for the year.
If your loan origination date was after Dec. 16, 2017 then you can deduct the interest up to $750,000 of mortgage debt ($375,000 if married but filing separately). If you refinanced a mortgage, the limit depends on the old loan’s origination date.
Mortgage Discount Points Deduction
When shopping for a loan, mortgage service providers will sometimes offer a lower rate if you choose to buy discount points. The amount paid for the discount points paid during mortgage closing can be claimed under itemized deduction from your taxable income. The price you pay per point varies by lender. For example, I was able to buy 1% discount point for $2,400 from my lender that lowered my monthly payment by $40 per month. Therefore, I would recover my $2,400 cost after 60 months (60 months x $40 savings). The math makes sense to purchase the point because I plan to keep the home longer than 60 months.
Property taxes
Property taxes are not as bad as most renters believe. The tax is based on the price value of your home. For California, I pay 0.77% because the property prices are about $1,000,000 on average. For Illinois, my wife pays 2.31% but homes in Chicago are about $300,000 on average. You deduct the property taxes under itemized deduction up to $10,000 ($5,000 if married but filing separately) of property taxes in combination with state and local income taxes or sales taxes.
Building your Family Legacy
One of my favorite movies is A Good Year starring Russell Crowe. Without giving away too much from the movie, the protagonist, Max Skinner, inherits a winery from his Uncle Henry in France. At first, Max wants to sell it for a profit, but instead Max finds himself reminiscing about his childhood memories from when he would spend his summers with his uncle at this winery. Of course there is much more to this movie but you will have to check it out yourself.
The point that I am trying to make is the very fact that his uncle owned property. Property that he was able to pass down as part of his family legacy to his nephew. My wife wants to sell her Chicago home because it is difficult to manage tenants from California. However, I am begging her not to because we would have wasted the past 11 years of owning and collecting rent. I want her to just pay off the final 19 years and be able to pass that home down to our kids as part of our family legacy. (*Update* She was able to refinance her Chicago home with a 15-year mortgage at a much lower interest rate. Thank you coronavirus. The perfect scenario of paying less money while gaining back 4 years.) My kids already have memories of playing in the Chicago house backyard while visiting Sue the T-Rex at the Chicago Field History Museum.
Creating Rental Income
Real estate has been good to me. During the subprime mortgage financial crisis, I acquired two key investment properties. In 2010, I purchased a foreclosed 2-bedroom 2-bath condominium in an abandoned complex. In 2011, I purchased a short-sale townhome that was desperate for a buyer after a failed deal. Both of these properties had hidden equity where my wife and I have been fortunate to unlock. Owning the properties have not only created the rental income stream we were looking for but also increased our overall net worth. Another residual benefit of owning a home is learning from DIY projects where we even impressed ourselves.
| Property | Monthly Mortgage | Rental Income | Cash Flow |
| Peninsula House | $2,806.26 | $1,800 | -$1,006.26 |
| South Bay House | $4,365.97 | $5,000 | +$634.03 |
| South Bay Townhome | $1,225.82 | $3,500 | +$2,274.18 |
| Chicago Multi-Unit | $1,589.81 | $2,600 | +$1,010.19 |
| ——– | ——– | ——– | ——– |
| | $9,987.86 | $12,900.00 | +$2,912.14 |
| | Total Monthly | Total Income | Total Cash Flow |
Quick Summary
I hope that I have convinced at least some of my readers that owning a home is better than renting. Owning a home allows you to start building equity and growing your personal wealth. The last time I checked, rent money buys you nothing and has a 0% ROI. The benefits of owning a home include:
- increasing your personal worth
- tax deductions for homeowners
- building your family legacy
- creating rental income
What are your thoughts about owning versus renting? Do you have any horrible property management stories to share with me?
