Renting VS Buying

 

Many of us are no stranger to renting, but for those who are unfamiliar with the concept, renting an apartment / house is where you pay the homeowner or landlord a sum of money periodically in exchange for temporary residence. Buying would be the other side of the coin, where instead of a temporary contract with a landlord, you buy the apartment, either paying down an initial deposit of a certain % of the asking price and getting a loan from a bank, or paying cash in full.

Statistics

Some statistics regarding home-ownership:

  • While the number may vary state-to-state, homeownership in the US currently sits at approximately 65% with the remaining 35% of the population renting.
  • The average mortgage payment is approximately USD1,300 a month while the average rent payment is USD1,150 a month.
  • Excluding home equity, the median household wealth for homeowners sits at almost USD100,000, while it is closer to USD6,300 for renters.
  • Unsurprisingly, States with a significantly higher cost of living (NY, CA) tend to have lower numbers of homeownership and a higher % of the population as renters as compared to states with a lower cost of living.

How does this compare to the rest of the world?

  • Switzerland has the highest % of population renting worldwide, at 56.6%.
    • A big reason for this is the high cost of housing in Switzerland, pricing out a large percentage of its population from the housing market. A mirror of this can be seen in California and New York where housing is more expensive, hence a higher rate of renting. It is also much cheaper in the short-mid term to rent an apartment, and home-ownership in Switzerland incurs a steep housing tax.
    • The average rental for a one-bedroom apartment in Switzerland costs USD2,150/month, on top of an average of USD1,600 living expenses a month. This makes Switzerland an extremely expensive country to live in.
  • South Korea has a relatively high % of renters as well at 44.8%.
    • South Korea is a big country with many cities with varying costs-of-living. An apartment in the capital Seoul would cost significantly more a city on the outskirts.

      Comparison

Homeownership does have a lot of obvious benefits that many people might already know about. Some financial differences would be long-term costs and upfront costs, including debt.

  1. Monthly Cost and Equity Ownership
    Often, the rent for an apartment would cost more than the monthly mortgage for a similarly sized apartment. On top of this, whatever you are paying goes towards home equity which you own while rent goes towards the landlord. Monthly-mortgage payment increases the dollar value of assets you own but rent is an expense. In comparison, home-ownership may include things like housing tax that renting does not.
  2. Upfront costs
    Both renting and homeownership often have upfront costs. Renting often has an upfront bond payment, which the landlord keeps as an insurance policy in the event you mess up the house. This is usually a multiple of your rent, anywhere between two weeks to two months rent, possibly more. Homeownership often has a down payment, ranging from 5% – 20% depending on the country. For a $600,000 apartment, that would be $30,000 to $120,000 in down-payment.As you can probably tell, the upfront cost differs greatly, which might be one of the reasons for the difference between the net worth of individuals who own their apartments and rent.
  3. Debt
    Getting a mortgage can often mean going into long-term debt, which often can be daunting for first-time homeowners. Some people do not sleep well at night knowing that they have a large amount of debt looming over them.

There are also non-financial aspects to home-ownership that is worth discussing. Some of this might include housemates, peace of mind, and permanence. 

  1. Housemates
    While you technically might still be staying with someone if you own your apartment, you usually choose who you stay with when you own your apartment. However, you might not have this luxury when you are renting, especially if you’re not renting with friends or are on a lower budget (renting an individual room in a multi-room apartment). This can sometimes cause friction between individuals if your living habits clash with one another. This is one of the bigger downsides of renting that is more commonly talked about. To be fair, even friends can fight as housemates.
  2. Peace of mind
    When renting, you are often at the mercy of your landlord and the contract you signed. My friends and I learned the hard way that some landlords can be awful when things get rough (COVID-19), and the process of counter-suing a breach of contract can often cost more than what renters can afford. They may evict you or choose not to renew your rental despite your ability to pay, or may unfairly charge you for damages in the apartment or overcharge for bills. You are in control of all these when you own your own apartment, which can be a benefit or a downside, depending on how you see it. Homeownership often feels different. The house belongs to you and you are paying a monthly mortgage to increase your ownership of it.
  3. Convenience
    Renting can provide convenience if you travel often for work, or have not decided to settle down in a certain location yet. Exploring different cities or traveling to work will make buying a house challenging unless you have a significant amount of wealth. Having kids/dependents also makes it challenging to rent consistently as moving may be a chore as compared to home-ownership.

I guess the question of renting VS buying an apartment has a lot of considerations baked into it as listed above. Assuming being able to afford a mortgage, a lot of the non-financial considerations come into play. Whether you can stay with housemates, or if you travel for work, whether you are comfortable with debt or have dependents.

Personal thoughts

Being on the younger end of the millennial age group, I have never personally experienced owning my own property. However, I do stay with my parents (a pretty common thing in Asian culture and where I am from) when I am not staying overseas. I rented through my college and had rented 2 different apartments through the four years. I had the fortune of staying with my friends who owned their apartment for one of them. Rent was lower than the market rate and I had a great experience.

The first rental was challenging as the apartment was gorgeous but expensive (it was still below the market rate for its area). The pandemic hit and I ended up paying rent for the whole apartment, which was two rooms instead of just my own while I was not even in the country. This put quite a dent in my finances, but it did expose me to the good and bad of renting.

Renting is very luck-reliant to some extent. How good your housemates are and how good your landlords are. Despite my issues with my first rental, the agency that handled my tenancy was really good, fixing everything on time when needed and communicating well with me. On the other hand, I have also heard horror stories regarding renting.

Verdict

Personal finance is, well, very personal. There isn’t one clear-cut answer for every situation. It would be good to go through the list of things listed above and list down your thoughts on each, then see whether you are ready for homeownership or not (assuming you have checked out your math for your finances).

Regards,
– Sam (@spendingonbrownies)