A lot of people have grown up being told that owning a house is better than renting and that your home is an asset. The truth is that renting can sometimes be smarter than buying and owning a house can be a liability rather than an asset.
As an experienced real estate investor, I’ve come to understand the realities of both buying and renting. So, what are assets and liabilities? And what are the differences between renting and owning? Let’s take a closer look so you know your options.
- Liabilities and Assets
- Benefits and Drawbacks
- Benefits of Owning
- Drawbacks of Owning
- Benefits of Renting
- Drawbacks of Renting
- Is it Better to Rent or Own?
Liabilities and Assets
I used to think that I understood what these terms meant, but that all changed when I read Rich Dad Poor Dad by Robert Kiyosaki.
Without the wisdom of that book, I might never have gotten into real estate investing. This is where I first learned what assets and liabilities really are — and that the path to financial freedom is not necessarily the same as what our parents taught us.
Liability: Something you owe money for. Think of it as ownership of anything that costs you money. A liability means that money flows away from you.
Asset: A thing of value. Think of it as ownership of something that makes you money. An asset generates money that flows to you.
Benefits and Drawbacks
Buying a property brings a whole set of financial responsibilities beyond making a hefty down payment. But don’t think that things are necessarily easier when renting, as that puts limits on you, too.
Let’s look at the upsides and downsides of owning and renting, including any liabilities —expenses that come out of your pocket — in the sections below.
Benefits of Owning
- Building equity and paying down debt with a portion of your monthly payments — in the long-term, you could own the property free and clear, with all the benefits of the very likely increase in equity.
- Once you’ve built up enough equity, you could qualify for a Home Equity Line of Credit (HELOC).
- Tax benefits — you can deduct the amount of interest you pay on your mortgage. This is limited to a loan value of $750,000 in 2023.
- Ability to make changes to the property — you can redesign anything and everything, to optimize resale value or simply have a nicer space in which to live. You choose who does the work.
Drawbacks of Owning
- Mortgage payments — unless you purchase the property all in cash, you’ll be paying off some combination of principal and interest for a while (usually 30 years).
- Property tax and insurance — unavoidable expenses that all homeowners have to take on board.
- Utilities — water, electricity, heating, gas, internet access, etc. None of it comes free with your property.
- Longer-term commitment — it usually doesn’t make financial sense to own for under 5 years when you factor in the closing costs of both a purchase and a subsequent sale.
- Can cost more than renting — depending on your location.
- Responsible for covering the cost and coordinating maintenance — all repairs, improvements, and maintenance come out of your pocket.
Benefits of Renting
- Flexibility — most rental agreements will last only a year, then you’re free to move on if you wish.
- Can cost less than purchasing — depending on your location.
- No maintenance costs — those leaky pipes are your landlord’s responsibility, not yours.
- No property tax — though you’ll still need to pay renter’s insurance.
- Some utilities (often water) could be covered by the landlord.
Drawbacks of Renting
- No equity gains — you aren’t paying down mortgage debt and any long-term increase in property value isn’t going to benefit you.
- No tax benefits — you have no mortgage interest to deduct.
- Usually can’t make large changes to the property — you have to deal with your landlord’s choices.
- Repairs have to be requested through your landlord and you don’t choose which service providers come in and out of your space, and when they will do that.
Is it Better to Rent or Own?
As you can see, both approaches have benefits and drawbacks, so the answer really depends on your current situation. This is why you really need to figure out your specific wants and needs. It’s never as simple as saying something like “Younger people should rent and older people should own.”
For example, if you read about house hacking, you’ll see there’s a great case for people to start owning property, building equity, and producing passive income. On the flip side, perhaps some people might want to free up the trapped equity in their homes and switch to renting so that they can enjoy their money while they still can.
Knowing when to rent and when to own is what smart investors do to maximize their returns and reduce their stress. I’ve done both successfully and have learned the lessons that I share in my book, Backstage Guide to Real Estate.
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