Many people feel that buying houses is risky. You could lose your job, you could have a medical issue, or you could suffer some other financial hardship that will prevent you from making payments. You could then lose your house to foreclosure and have a huge financial mess. However, renting a house may be even riskier. When you buy a house, you have control of the property and know what the mortgage payments will be. When you rent, you have no control and could find yourself paying more and more while also having to constantly move.
What are the risks of renting houses?
A lot of people feel that renting is better than buying because it doesn’t tie them down. Most leases on a rental property last one or possibly two years. When you buy a house, you may have to live there for many years before you can sell. When you rent, you also do not have to pay for repairs. The landlord should make repairs and cover the cost if it is not the tenant’s fault. However, rental properties do come with a big risk: rent increases.
I own rentals and buy many properties that I end up flipping. Often, I run into tenants who have lived in properties for years. The landlords never raise rents or the market rents may stay stable for years. Some tenants get used to low rents but are forced into a very rough situation when rents are raised or they are forced to move. In one house I bought, the tenants were paying $400 per month, yet the market dictated $1,000 per month. I was going to flip the property, and I had to be the one to tell the tenants they would have to find a new place to live. I gave them plenty of time to find a new rental, but it was almost impossible for them to find a place with rental rates near their current rate. There are many other cases where tenants are forced to move, and they have to come up with a deposit and first month’s rent on a much more expensive place.
What are the advantages of buying a house?
I don’t think everyone should buy a house. I go into why you should or should not buy in a previous article. I will not rehash that entire article. Instead, I’ll focus on a very important advantage to buying. When you buy a house, your mortgage payment will stay almost the same. Your taxes and insurance may increase, but the loan portion of your payment will stay the same on a fixed rate loan (ARM loans can have higher payments).
While renters face rising rent or may be kicked out as soon as their lease is up, an owner has a fixed cost and can’t be kicked out if they are making their payments. A homeowner does not run the risk of making payments for ten years and then suddenly being forced to move. On the flip I bought where the tenants were paying $400 a month, they had lived there for ten years. If they would have bought a house ten years ago instead of renting, they would be in an awesome financial position. They would not have had to move, they would have had a lot of equity in the home, and eventually they would have paid off their loan. If you plan on living in the same area for a long time, it almost always makes sense to buy a house.
Can refinancing a house you own increase your payments?
Some of you may be thinking that mortgage payments will stay the same if the homeowners never refinance. It is true that refinancing your house can increase the payments, especially if you take cash out. When you complete a cash-out refinance, you increase the loan amount and get money back. With a refinance, you could get a check for $10,000, $20,000, or much more. It only makes sense that your payments would increase since you the amount you owe will rise. When renting, your payments could go up, and you won’t get any money back! With that said, if you refinance, you must make sure you can afford the new, higher mortgage payments.
How bad will you be hurt financially if you stop paying rent or stop making mortgage payments?
People are very afraid of foreclosures as they can wreck your credit for years. They can also prevent you from buying a house for years. Missing rent payments can also hurt you financially and be much more troublesome than a foreclosure. When you stop paying rent, the landlord can evict you after missing one payment. Depending on what state you live in, it could take a couple of weeks or a couple of months to complete the eviction. The landlord can take you to court to go after the eviction costs and any property damage you caused. A tenant’s liability is not limited to just their security deposit. If the court finds in favor of the landlord, a judgement can be placed against the tenant, which can hurt the tenant’s credit and prevent them from buying a house as well.
The process is much different when a homeowner goes through a foreclosure. The homeowner will have to miss multiple house payments, and the bank will have to go through a foreclosure process, which could take a couple of months or even a couple of years depending on the home’s condition. The bank cannot legally kick someone out of their home until the foreclosure is completed. The homeowners can technically live in the home for free until the foreclosure is completed. Even after the foreclosure is done, the bank will have to complete an eviction to get the owners out of the house. In some cases, the bank will offer the homeowner cash for keys, which means they will pay them to move out! That will most likely never happen in a rental property.
While most people think that renting a property is the safer option, buying a home is—financially—the better option, especially if you get into trouble. It takes much longer to lose your house when you own it. If you have equity, you might be able to sell before you lose the house, and in the worst case scenario you get to live rent and mortgage free for a few months.
For more information on buying and selling houses, check out my best-selling book: How to Buy a House: What Everyone Should Know Before They Buy or Sell a Home.
It does not make sense for everyone to buy a house. There are many cases where renting makes more sense, like when you are moving all the time or if property values are much higher than rent prices. Some of the most difficult situations I have seen are where people rent properties for years assuming they will be able to live there for the same payment amount forever. If they have to move, they have a very tough time finding a new place to live for anywhere close to what they were paying. While it is not fun to think about what happens if you cannot pay your rent or mortgage, most people are in a better situation if they own a home and cannot make payments than if they were renting.