Renting vs. Owning

Renting vs. Owning The Difference Between Renting and Owning a Home

Outline • Introduction • Reasons for making a housing choice • Comparison of Expenses • Renting • Advantages and disadvantages • Owning • Advantages and disadvantages

Introduction • Housing is the largest personal expenditure • About 28% (max of 30%) of a person’s gross income (the amount you make BEFORE taxes are taken from you paycheck) • Choosing where to live is based upon a person’s goals, values, needs, and wants • Places to live include: • House, apartment, condo, mobile home, etc.

Reasons for Making a Housing Choice • Personal and financial goals • Personal values, needs, and wants • Amount of money available for housing costs • Financial resources and readiness • Credit history • Real estate prices • Location preference • Expected length of stay in particular place

Costs of Renting • Application Fee • Credit Check Fee • Security deposit • Advance on Rent • Moving • Monthly rent • Utilities – electricity, water, garbage, etc. • Renter’s insurance • Parking

Costs of Ownership • Earnest Money • Application and Credit Check Fees • Inspection Fees • Down payment (one time cost) • Closing costs (one time cost) • Monthly mortgage payments • Utilities – electricity, water, garbage, etc. • Homeowner’s insurance • Real estate property taxes • Maintenance

Renting • Rent • The cost of using someone else’s property • Tenant (renter) • The person who rents the property • Renters are generally • People who choose not to own a home • People who cannot afford to own a home • Move often • Just starting out in a new job and has little to spend • Retired couples

Renting continued • Landlord • Owner of the rental property • May perform management duties or hire a property manager • Property manager - may charge a fee to the landlord to perform the management tasks • Duties • May collect rent and deposits, pay utility bills, complete repairs and maintenance, watch over the property, respond to tenant complaints, assign new tenants, etc.

Moving into a Rental • Upon moving into a new place, people are usually required to pay a security deposit and sign a lease • Security deposit • An advance payment to cover anything beyond normal wear and tear on the unit • Lease • A legal contract between the tenant and the landlord, specifying the responsibilities and rights of both parties • Identifies the rent amount, security deposit amount and specifications, payment for utility bills, late payment penalties, length of lease, eviction terms, etc.

Low move-in costs Fixed monthly expenses – predictable housing costs Easy to move - mobility Location choices (may be close to work or school) Less maintenance and repair work Fewer responsibilities May offer extra amenities such as a tennis court or pool Less expensive than home ownership May be able to save for other wants or needs if renting a less expensive apartment Other expenses may be included in rent payment such as electricity, water, sewer, and/or garbage Advantages of Renting

Subject to terms of a lease Rent may change with little notice Less privacy and transient neighbors Restrictions on noise level, pets, etc. Fewer opportunities to upgrade apartment such as new carpet, paint, or wallpaper When leaving a property, no equity is returned as it would be if selling a home No tax deductions May lose rental if the property is sold Disadvantages of Renting

Analyze the following when considering your housing choice • Income – determine both monthly and yearly income…is the income steady • Expenses – A. Fixed: paid regularly and the amount is basically the same for each payment B. Flexible: vary in amount and do not occur regularly • Savings – life is full of surprises and savings makes it easier to cope with unplanned expenses…must save money for a down payment and closing costs…after moving into a home or apartment savings can be helpful for paying for unexpected repairs • Strengthen Your Finances – make a financial plan…pay yourself first…reduce flexible spending…limit impulse buying…keep records to know how much money has been used • Human Resources – investing time, energy and talent into a home can save you money…buy a fixer-upper…become your own Interior Designer…do your own plumbing

Rental Abbreviations • When looking for housing in the newspaper or on some internet sites, you will notice that apartments and houses are usually described with abbreviations. Below are the most commonly used abbreviations. • apt - apartment • a/c - air conditiioning • apls - appliances • b/c - balcony • ct - a bathroom with ceramic tile • crptg - carpeting • dlx - deluxe • english apt - same as a garden apartment • f/a - forced air, new heating and cooling system, will have its own meter • fpl - fireplace • garden apartment - ground level or basement apartment • hdwd fl - hard wood floor • htd - heated • lft - loft, which is a large room, probably a converted warehouse • mstr bdrm - master bedroom • mod - modern • nly dec - newly decorated • pnty - a pantry • sm - small • spcs - spacious • tenant htd - tenant pays for heating • wf - wooden floors • Text page 152

Affordable Options • Privately Owned Housing • Public Housing – designed for low-income families, senior citizens and those with disabilities (built for those that cannot afford private housing…rent is usually set as a percentage of the monthly income of the renter…if you make below a certain amount you qualify) • Subsidized Housing – government helps low-income families live in private housing by paying part of the rent…payments are sent directly to the housing owner…the tenants pay what they can afford and the government pays the rest…families that live in these units must meet certain income guidelines

Home Ownership • Home ownership - the buyer has purchased a housing unit as property • Goal of many Americans • A large financial decision • Owning a home is an investment because if a person sells a home for more than what it was bought for, the person makes money. This is called equity. • Financial planning and savings can assist a person in planning for the benefits of home ownership later in life

Purchasing a Home • 90% of buyers take out a mortgage • A home loan in which the real estate is the collateral • Collateral is an item promised to the lender if the borrower does not pay back the loan, usually the home • Down payment • Amount of money paid on the home at time of purchase • Typically 10 – 20% of the purchase price of the home • Recommended purchase price amount an individual should pay for a home • 28% of their annual household income

Build equity which can be borrowed against if necessary Pride of ownership Feel more comfortable and have more privacy Stable mortgage payments More room and storage Improvement of buyer’s credit rating Income tax deductions for property taxes and mortgage interest Potential for property to increase in value Free to make home improvements and have pets (items typically not allowed in rentals) Feeling of belonging Advantages of Ownership

Large down payment Move-in costs Insurance costs Possible for property to decrease in value Time, money, and energy commitment Repair and maintenance costs Property taxes can raise substantially Money is tied up in the home May take several months to sell a home if trying to relocate Disadvantages of Ownership

Mortgage Terms • Principal – original amount of a loan • Interest – money/fee charged to borrow the money • Amortization – the gradual elimination of the principal of a loan • Equity – the difference between the price a home might sell for and the market value of the home (if the market value of the home is $150,000 and the remaining principal on the loan is $100,000 the equity the owner has is $50,000) • Escrow – money held in trust by a third party until a specified time…such as taxes and insurance payments are due…at that time the lender withdraws the money from the escrow account and makes the tax and/or insurance payment on behalf of the homeowner

Types of Mortgages • Conventional – borrower pays fixed interest rate…length of the loan is usually 15-30 years…good choice when interest rates are very low because the interest rates remain the same for the length of the loan • Adjustable Rate – interest rate changes after a certain length of time…usually every 1-5 years…changes in the rate are determined by the terms of the mortgage…limit/cap on how high or low the rate can go…paid over 15-30 year period of time…usually start with lower interest rates than those with fixed rates…good choice for people who are not staying in one place for a long period of time or are not earning enough to afford a conventional loan • Graduated Payment – payments start out low and increase with time…popular with first time homeowners

Condominium and Cooperative Ownership • Condominiums – person buys a unit in a multifamily dwelling (apartment building, town house, or du/triplex…person is responsible for home loan payments, taxes and interior maintenance…also part owners of common areas (hallways, building exterior and outer grounds) and must share in the upkeep of these areas…group collects fees to cover upkeep of common areas and provide services such as trash pickup…owners vote on the important issues concerning the property. • Cooperatives – allows people to buy shares of stock in a nonprofit corporation…the corporation owns the property…the number of shares a person owns is determined by the cost of each unit…some members sit on a board of directors…board of directors arranges maintenance and services which are paid for by fees collected from each owner…all owners can approve or reject the sale of a unit.

Keep In Mind. . . People are always paying for a home. It’s just a matter of whether it is for themselves or their landlord.

Renting vs. Owning