Renting Vs. Buying for Current and Future PAs

Do you think you should own a home, or rent a place? Most people tend to be very polarized in their view of whether owning a home or renting is the best solution, not only for themselves, but for everyone else as well. They tend to think that one answer fits all, such as “Everyone should rent!” or “Everyone should own a home!”, but this simply isn’t the case. 

As previously discussed in this post, housing is one of The Big 3 Budget Items in most American’s monthly budgets. Many newly graduated PAs are looking to jump into the American Dream of becoming a home owner. But, hold on, not so fast! Let’s review the debate of homeownership versus renting through the lens of a PA, and dispel some commonly believed myths along the way. 

Myth: You can simply directly compare the monthly mortgage of a house to the monthly rental rate of a place.

This is absolutely false, as the monthly mortgage of a home fails to include so many other disguised costs of homeownership: 

Maintenance Costs: 

Owning a home comes with a lot of maintenance costs for the upkeep of everything in the house as well as outside. For example, indoor maintenance costs can include furnace, water heater, appliances, windows, etc. Some examples of outdoor maintenance costs can include the roof, deck, patio, as well as maintaining the property by mowing and snowplowing depending on the part of the country you’re from. On the other hand, if you were a renter, and an appliance stops working, you would not be responsible for either paying to have the appliance fixed, or for the cost of a brand new one. 

Property Taxes: 

If you’re a homeowner, you have to pay taxes for your place. Often, the property taxes are included in your monthly mortgage payment (depending on if it’s escrowed or not). However, this means that if your property tax amount increases (as it often does), your mortgage payment can increase as well sort of suddenly.

Insurance: 

If you still have a mortgage on your home, you are required to purchase homeowners insurance (which sometimes may be escrowed as well). Alternatively, if you’re a renter, your landlord / property management company may require you to carry renter’s insurance, but not always. 

Mortgage Interest: 

If you have a mortgage, much of what you’re actually paying for at the beginning is the interest you owe on your mortgage versus the actual principal. 

Transaction Fees: 

Both purchasing and selling a house can elicit fees such as real estate agent commissions, closing costs, etc.

Myth: Renting is just throwing away your money. 

The purpose of renting or owning a home is to provide yourself and your family a place to live. Either way, you’re exchanging some of your hard-earned income for housing, or a roof over your head. 

Many can find a place to rent for a lot cheaper than a mortgage in their area. If that is the case, and if you are a PA on the way to FI, then ideally you are investing this savings, which may help you build your wealth more quickly.

Myth: Owning a home is such a great investment!

Although a home’s value can increase with time, it often can only be keeping up with inflation, depending on the market that year. This current year in 2021, home prices have seemed to have skyrocketed, but that is not always the case. J. L. Collins, author of The Simple Path to Wealth, compiled a whole post about why your house is a terrible investment.

Depending on the area of the country you live in, as well as the market, it is possible that you may make out better owning a home. However, don’t forget to factor in those hidden costs that we’ve already reviewed. The bottom line is that typically, your primary residence should not be viewed as an investment. This certainly does not apply to investing in real estate or rental properties. 

Now let’s review some pros and cons of renting and homeownership. These are not all-inclusive lists!

Pros and Cons of Renting 

In my opinion, every good pros and cons list starts with the Pros: 

• Renting may be cheaper than owning. 
• Renting is a more flexible housing option with more freedom than owning. As long as you follow your lease, you can fairly easily stop renting in a city and rent a new place in another. 
• Possibly no maintenance costs, or if there are some, they are few. 
• Furnishing an apartment can often be pretty cost effective. 
• You may feel less stress if you rent since you are not the owner. 
• There’s a good chance that you may not have to upkeep the property by mowing, snowplowing, etc.
• You don’t need to have a large deposit saved up to start renting. 

Followed by the Cons: 

• Rent prices will likely increase over time, and depending on the area of the country and market, could exceed the cost of mortgage payments. 
• You ultimately will not own the property. 
• You have to follow your landlord’s rules, which may mean that you may not be able to have pets or may not be able to even paint the walls.  
• Likely will have close neighbors. 
• Since you’re not the owner, you are at the mercy of the landlord / property owner. 
• There’s no end to monthly payments. 

Pros and Cons of Homeownership 

Pros: 

• Your equity may help to build wealth (if the costs of ownership don’t counteract this too much).
• Your monthly mortgage payments eventually end. 
• There may be some tax benefits for you. 
• Since you own your home, you can create your own rules, such as having pets, painting the walls, or renovating the home. 
• You’re not a the mercy of a landlord / property owner.
• The monthly mortgage payments eventually end once the mortgage is paid off. 
• Depending on the sale, you can avoid paying taxes on the capital gains of your house  once you sell. 
• You could decide to rent out a portion of your home to others. (House Hacking)

Cons: 

• Has more underlying costs such as taxes, homeowners insurance, maintenance, and transaction fees as previously discussed. 
• Often need a fair amount of money for a down payment. 
• Not a very flexible housing option as it is often viewed as a long-term commitment for housing. 
• Mortgage payments may be more expensive than rent payments. 
• Qualifying and obtaining a mortgage may be a somewhat difficult process. 
• The value of your home may decrease at times. 

How to decide whether to rent or buy a home? 

If you’re a newly graduated PA, and either you or you and your spouse don’t know where in the state or country that you want to settle down for the next several years, renting may be the way to go. Additionally, if you’re just starting a new job, and aren’t 100% positive that it is the speciality or practice location for you for the next several years, then the flexibility that renting provides may be best in your situation. 

Alternatively, if you and your spouse have found the area that you want to settle down in, and your jobs seem pretty stable as you feel like you can work in that speciality and practice location for several years, then buying a home may be the better choice for you. 

If you decide homeownership is right for you, consider house hacking and / or geoarbitrage to help keep costs low. 

House Hacking: 

An excellent suggestion to consider to help you save on housing is the concept of house hacking. House hacking is the idea of renting out a portion of your residence to offset the cost of your home. Some people will purchase a duplex or triplex, and live in one of the units, while renting out the other unit(s) to tenants. Others will purchase a house to live in, while renting out rooms or spaces to roommates or tenants. The generated income will likely cover most, if not all of the mortgage, allowing you to live for free while building equity in the property. You may decide to continue this idea until you and your partner start your lives together, though many couples will choose to continue this concept if the roommates or tenants are in a more separate area of the property. This is of course assuming that everyone would be onboard with the idea! Housing costs consume approximately one-third of people’s living expenses, so this is an area where cutting back on costs will help to boost your savings rate!

Geoarbitrage: 

Whether you are considering renting or purchasing a house, consider the concept of geoarbitrage. Geoarbitrage is the notion of moving either to another town, state, or even another country to experience a lower cost of living, which can drastically help increase your savings! In a lower cost of living place, both the rent and the cost of a home are likely cheaper than more expensive places. For example, states like California and New York are known to be expensive places to dwell. However, a PA may consider moving to to a state in the Midwest or even the South where the cost of living can be substantially more affordable, and it may even be possible that their income is increased if the area has a shortage of providers. Now let’s consider an example of someone already living in the Midwest (where I call home), and say they are currently living in a large city or capital city of a Midwestern state. Well, if that person were simply to move one county over, they may be able to purchase a house a few minutes away while getting more bang for their buck in a different county. They may also get to enjoy lower property taxes. This would be an example of how you can use geoarbitrage within your own state.

Many people also will choose to move to another cheaper country for geoarbitrage. If you’re considering geoarbitrage in the future before you retire, the list of PA-friendly countries where PAs are able to practice is growing every year. Some examples include Canada, the United Kingdom, the Netherlands, Ghana, and South Africa. Otherwise, many retirees will move to countries with low cost of living to allow their retirement funds to go further. Central America and South America are popular FI geoarbitrage destinations, as well as South East Asia, though there truly are so many options abroad to consider!

The Bottom Line: 

The bottom line is that renting versus homeownership is not one size fits all, and the better option for you and your spouse and family can change over time. Or perhaps you even decide that you’d rather not rent OR buy a home, but rather decide to live a more nomadic lifestyle by purchasing an RV to travel the country working per diem jobs as a PA, or even have a fully telemedicine role that would allow you to do so! There are so many options out there, and I encourage you to not feel pressured to buy a giant house right away as a new PA just because you (or your family) thinks that it is the American Dream.