5 Advantages of Renting
Updated: Sep 2, 2021
If you're anything like me, you would have grown up surrounded by adults saying something like "renting is just throwing money away, buying is the better choice". I believed this statement for quite some time and it was ingrained in our upbringing. But is it true?
Well, not entirely. While I won't say that one way is better than another, I will say that renting can have some advantages over buying. The same can be said for purchasing your home to live in (primary residence, investment properties are a different conversation). Each will have pros and cons.
Let's cover off on some advantages that renting can have over buying.
1. No large down payment needed
Depending on which country you live in, you'll often be required to pay a security deposit, known as a "bond" in Australia, which is usually a month's worth of rent. In the US, they have "first and last month's rent, plus a security deposit" in most cases. The security deposit is usually a month of rent, but you can get that back at the end of the tenancy if all conditions are met.
So in Australia you'll be up for 1 month of rent before even moving in, and in the US you'd essentially be up for 3 month's of rent.
For a real example, let's say you're looking at a $2,000/month property to rent. In Australia, you'd have to fork out $2,000 for the bond, and in the US you'd likely have to fork out $6,000. That's a fair bit of cash to hand over, but in comparison to a mortgage down payment, it's likely to be a lot less.
Using the $2,000/month property, it might cost around $250,000 to buy. In Australia you can get a mortgage with 5% down plus closing costs (if certain conditions are met), and 3.5% in the US (most commonly). So that would be $12,500 and $8,750 plus closing costs in Australia and the US respectively.
Keep in mind that if you have less than a 20% deposit when buying a home, you'll have to pay "LMI" (PMI in the US), which is Lenders Mortgage Insurance, for the privilege of being able to put a lower deposit down. This is the insurance you have to pay on behalf of the lender, which equates to about 1% of the mortgage annually, until you hold at least 20% equity in the property. Something to keep in mind.
2. Renting has no direct property taxes
If you're a homeowner you'll know the annoyance of having to pay for your mortgage and then pay for property taxes on top of that! In Australia, we're not subject to land tax for a primary residence, but we do have to pay "local council rates", usually on a quarterly basis, which can be called "property tax" in this context.
When you're renting, you simply pay your rent and that's it. No extra fees that pop up. With only the rent to worry about it can be easier to manage your cash flow and forecast what your expenses will be.
Although it would be remis of me not to mention that all or a portion of the property tax cost would likely be included into your rent amount. While you won't be paying taxes directly, indirectly the tenant would be covering these costs.
3. You have the choice to live where you want (within reason)
This is a pretty big advantage, especially if you're young or early in your career and want the flexibility to move around at the drop of a hat. With the entry costs for a rental so low compared to buying a property, you could live somewhere for a year and then decide to move across the state or country to somewhere completely different without the worry of a financial commitment.
While you could buy a property at each place you move to, this would involve extra costs such a agent and legal fees, conveyancer costs, closing costs and more. This is still doable, but keep in mind the time it takes to close on a property, and that's after you've found the one you want and had an offer accepted. This can be a pretty big road block in the process.
In some markets, you may be priced out of buying in the area while renting can be more affordable. It can also be like a "try before you buy" scenario, where you have the chance to live in an area to get a feel for what it's like before making a big commitment of buying there.
4. Renting can come with cheaper insurance
Who doesn't love insurance? Paying a premium "just in case" something goes wrong. Nobody really likes paying insurance, but most would agree it's a necessary cost, especially when it comes to auto and home insurance.
The good news is if you're a tenant (i.e. renting) you don't have to pay for home insurance. The landlord is responsible for this cost and this covers damages to the property itself. It would still be a good idea to have insurance to cover the value of your contents within the house, often known as - you guessed it - "contents insurance".
Like with the property taxes, you will likely indirectly pay for the cost of home owner's insurance through your rental cost. Nevertheless, it's still one less insurance contract you have to hold in your name.
5. No direct maintenance costs with renting
That leaky tap being a pain? Not a problem, the landlord will fix it. Hot water tank blown up? No cost to you. All jokes aside, unless you damage something in the property, you aren't responsible for the cost. There may be some agreements where the tenant is responsible for costs under a certain monetary value, but this isn't really the norm.
A property owner should factor around 0.5% - 1.0% for maintenance and home upkeep annually, which for a $250,000 property would be $1,250 to $2,500 each year. While it's not likely to cost the homeowner that much each year, there will come a time where major maintenance or renovations are required that would eat into any of that annual buffer and those costs need to be budgeted for.
Often times, maintenance costs aren't considered by the homeowner when setting rent prices and can catch them unaware when something pops up and they have to cover it. Other times, the landlord can factor these costs into the weekly rent so they are covered should something need to be repaired or replaced with short notice.
The Wrap Up
For as long as renting and buying are two housing options, there will always be a debate over which one is better than the other. In reality, there's no one right answer because everyone's situation is unique. There are certainly advantages that buying has over renting - a topic for another post - and if you're objective, there's no arguing that point.
The 5 advantages I've listed here today sheds a positive light for the rental life. With a much smaller down payment required and the flexibility to live where you want, you don't have to be committed to one property for any great length of time.
With a few of these advantages, it's important to note that some of the owner's cost can be passed onto you, the renter. As long as you're aware of this and choose a play to live that's affordable and allows you to live below your means, you'll be making a good financial decision.
Blake - FIRE with a family