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The Differences between Owning and Renting a Home

Oct 07, 2023
personal finance wealth real estate property philippines singapore

Buying your own home is commonly seen as a better decision than renting. After all, being able to purchase a property is considered a big achievement, while continuously paying rent with your hard-earned money seems like something that doesn’t get you anywhere.

But from a different perspective, there’s actually more to it than meets the eye. That’s why, in this article, I’ll be sharing an unbiased review of the advantages and disadvantages of owning a home or renting it. And I hope that after this, you’ll gain a better understanding of what is most suitable for you and your situation.

With that, let’s cover three (3) various differences between these options, starting with the ideas and values behind them.

Your Values

Most of the older generations prefer ownership, as it represents stability and settling down. Before, they knew life was as simple as getting married, working on your job, staying in it for many years, and raising your family in your very own house. Having that sense of security is what some people want in their lives or for their children to grow up with. And so if this is something you want to experience as well, then home ownership might be for you.

Meanwhile, with the different opportunities available nowadays, it created this new way of living. There are people who want to explore various things and travel to different places whenever they want to. And having that freedom and flexibility is what renting represents. So if being able to be on the go is something you value, then this may be the path suited for you.

Each option has a pre-existing notion connected to it. And while there’s some truth to it, there are also things that people should take into account. Now that we've covered the ideas and ideals behind these, let’s discuss the second crucial difference, which is the expense.

The Expenses

Commonly, buying a home is referred to as better than renting because of the money going into it. The thinking is that even if you commit to a 20-year loan, at least you’ll end up getting the house in 20 years. If you rent, they’ll say that you’re only making the landlord “richer” and end up with nothing.

But this rationale is overly simplified, as there’s much more that goes into it. So let’s have a quick view from a financial standpoint because it’s not just the monthly amortization versus the monthly rent.

There are a lot of costs associated with buying a home, like insurance, taxes, improvements, maintenance, repairs, and the down payment’s opportunity cost. For example, we have a house and lot worth PHP 2,000,000. The down payment is 20%, while 80% will be financed. If we use a bank’s home loan calculator with a 7% interest rate and a loan term of 20 years, we will have PHP 12,405 for monthly amortization.

House and Lot = PHP 2,000,000
Down payment = PHP 400,000
Loan = PHP 1,600,000
Monthly Amortization = PHP 12,405

Now, let’s go to the annual expenses. For the property taxes, let’s say PHP 7,500 per year. Then the insurance, maintenance, and improvements are PHP 50,000 a year.

Property Taxes = PHP 7,500
Insurance, Maintenance, and Improvements = PHP 50,000

Then, to keep things simple, we’ll assume that the one-time expenses like transfer tax and registration fees are about 3% of the total selling price. This is equivalent to PHP 60,000, which is 3% of PHP 2,000,000. Then again, our down payment is PHP 400,000. So the total amount of capital that we need is PHP 460, 000.

One-time expenses = PHP 60,000
Down payment = PHP 400,000
Total = PHP 460,000

Now let’s go to the opportunity cost. If you’re not yet familiar with what it is, opportunity cost is the cost of missing out on other investment opportunities. So in this case, let’s say we invested the PHP 460,000 in a bond, which gives a return of 5% a year. Upon computation, this means that we’re losing out on PHP 23,000 per year.

PHP 460,000 multiplied by 5% = PHP 23,000

Let’s now all put all the annual costs into a monthly term.

Property Taxes = PHP 7,500
Insurance, Maintenance, and Improvements = PHP 50,000
Opportunity Loss = PHP 23,000

Annual total = PHP 80,500
Monthly Expense = PHP 6,709

With this, the total monthly cost of owning the property is PHP 12,405 plus PHP 6,709 for the other expenses.

Monthly Amortization = PHP 12,405
Monthly Expense = PHP 6,709

Total Monthly Cost = PHP 19,114

Now that we have computed for it, this is what we’ll compare to the monthly rent. If the rent is significantly above PHP 19,114, then the property is worth buying. But if it’s significantly lower, then it’s more ideal to rent.

Of course, the numbers will vary per area and location, as well as the country. Identify all the monthly expenses and one-time fees and make a similar calculation before making a decision. This will help you be aware of your decision’s impact on your finances.

Since we have covered this, let’s go to the third thing we must consider, which are the risks that are out of our control.

The Risks

Before choosing, let’s talk about the risks each option poses. It’s important to discuss this since we never know when it may come up in the future.

For home ownership, the biggest risk here is that you’ll be committing to one place. I understand that this is given since we’re aiming for stability. But what happens is that you’ll be banking on the idea that the area the property is in will always have a good, livable environment. That it will always be accessible, safe, secure, flood-free, etc.

Remember that property values do not always go up. There are also economic, social, and political factors to consider. So if this declines, then you might want to move to another area. And these are the risks a home owner may need to face.

On the other hand, the biggest risk behind renting is that you have no full control. Because you’re only renting, you’re subject to what the landlord wants. If the landlord increases the rent, then you’ll either pay more or find a new place to stay. If the landlord sells the property and the buyer doesn’t want it to be rented, then you’ll need to look for a new place as well. If the contract ends and the landlord suddenly decides not to rent it anymore, then you’ll have to find a new home. Since freedom and flexibility come with renting, you should be flexible as a renter yourself.

And so, these are the three major essential factors you have to consider.

Whatever you choose, keep in mind that there’s no wrong path. Only you can identify what will be the most suitable option for you. Whether you choose to own a home or rent one, no option is better than the other. Be honest with yourself and understand these differences before deciding.

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