The (Sometimes Unexpected) Benefits and Drawbacks of Renting

You’ve heard the mantra over and over again – homeownership is king! It’s what we should all aspire to obtain! And for many folks, being a homeowner comes with many benefits.

But contrary to popular belief, renting isn’t exactly “throwing away” money each month. In fact, it can have some significant advantages over homeownership.

Here’s a look at the benefits and drawbacks of being a renter.

Benefits

• Flexibility
  • This is one of the BIGGEST advantages renting has over owning. If you need to make a move quickly, renting gives you more flexibility. This is especially the case if your landlord will permit you to break your lease (and many of them will, especially if you help them find a replacement tenant).

• Lower Cash Outlay
  • A security deposit, first month’s rent and, yes, even the broker’s fee is a lot easier to come up with versus the down payment you’d need to purchase a home in New York City which is usually to the tune of tens of thousands of dollars. Which leads me to the next point…

• More Money Available to Invest
  • Money that is tied up in real estate cannot be put into other investments. This means you’ll end up missing out on any gains you could have made via stocks and bonds. Additionally, real estate investments are not liquid like stocks and bonds – it’ll take longer to get your money out if you need to.

• Lower Maintenance and Repair Costs
  • Sure, you have a responsibility to maintain the premises during your tenancy, but major repairs are generally not your responsibility as a renter. As long as you didn’t do anything which would necessitate the repair, the landlord will take care of it.

• No Real Estate Taxes (at least, not directly)
  • The same goes for real estate taxes. They are likely accounted for in your rent, but it’s not something you have to worry about in the same way as your landlord.

• Lower Market Risk
  • If home prices go down, you’re not impacted by it in the same way as a homeowner. In fact, lower prices could work to your advantage once you decide to become a buyer.

• More Prime Areas
  • As a renter, you may be able to afford to live in an area where you might not be able to buy, due to the high cost of buying. For example, as of the date of this post, the median rent for a studio in the West Village was $2900 per month. However, the median price of a studio was $629,000. Assuming common charges of around $1000 per month, a 20% down payment, and an interest rate of about 4.25% on your mortgage, you’re looking at a monthly payment of around $3400 – that’s $500 more a month than renting. Not an insignificant difference!

• Financial Advantages
  • In some instances, it may actually take a while before the financial advantages of buying outweigh those of renting. Not sure what I mean? Check out this rent versus buy calculator from the NY Times – Is It Better to Rent or Buy?

Drawbacks

• Lack of Stability
  • This is the BIGGEST drawback of being a renter. Rents can (and often do) increase with each passing year; and unless you’re in a rent stabilized apartment, there’s no guarantee you’ll get a lease renewal. Frequent moves are going to be likely.

• You’re More Likely to Be Priced Out
  • And here’s the second biggest downer about being a renter. Renters tend to be far more vulnerable to the effects of gentrification, especially if they reside in market rate apartments which have no cap on annual rent increases. You might be able to afford the neighborhood you love now, but that may not continue to be the case in the near future, especially in rapidly gentrifying areas.

• You’re Not Building Equity
  • If you don’t own a place, then you’re not building any equity in your home. In some instances, this isn’t such a huge loss. But if you’re in an area where home prices are rising rapidly (south Brooklyn, for example), you could really be missing out.

• You’re Not Fully in Charge of Maintenance
  • While it’s great to not have to worry about covering the cost of repairs, this also means that you’re dependent upon someone else to properly maintain your apartment and your building. You likely will not have much say (if any) when it comes to the choices your landlord makes.

• Restrictions on Alterations
  • You’re much more limited in what you can change about an apartment when you rent it as opposed to own it. Sure, you have to follow condo and co-op rules when it comes to renovations, but at least you can renovate. And if you do make changes to the apartment, your landlord will often require that you restore the apartment to its original condition before you move out.

• No Tax Perks
  • The recent tax bill will impact the overall tax benefits of home ownership, but they definitely still exist. If you’re not a homeowner, you might be missing out.

• If Your Landlord Sells, You Might Get the Boot
  • If your landlord decides to sell their building, your lease could end up being terminated. Sure, there are some investors who would be happy to purchase a building with an existing rent roll in place. But many investors are looking to revamp buildings and either get a higher rent roll or a tidy profit via condo sales. In the past, this wasn’t such an issue. But with development occurring throughout the five boroughs at a breakneck pace, the possibility of this happening is much higher these days.

***

There you have it. Renting may not offer the roots that homeownership can provide, but it’s not always wasted money either. So if you’re not a homeowner yet, don’t sweat it too much 😉

Before you go…

Weighing whether or not you should move forward with buying a home? Or are you ready to get on the road to homeownership but you’re not quite sure where to start? READ THIS.