For several decades, home ownership was lauded for multiple reasons: You no longer need to throw money down the toilet every month in rent; at least some of your payment goes towards principal; in most years, your home appreciates and the gap between how much you owe and how much your home is worth widens–in a good way. In tough times, you could pull a line of credit on your home equity without paying the exorbitant rates that come with a standard line of credit. And lastly, you could deduct your mortgage interest.
Ah, the life of a homeowner. So many apparent benefits. I’m not being entirely fair, though, as there’s a whole line of reasoning as to why purchasing a home is a bad investment and a lot of the arguments carry weight. Homes are immobile, can depreciate, require maintenance costs, are complicated to buy and sell and are heavily taxed. When you settle into a house, you’re also at the mercy of your neighbors. Not just the everyday stuff like having their trash blow into your yard or hearing their dogs bark at night, but if they’re “motivated” to sell, it can “set the price for the whole neighborhood,” meaning you might take a loss if you’re selling around the same time.
The housing market is also prone to bubbles and when you start to realize that a bunch of people who own houses can’t be counted on to pay their mortgages, prices plummet. If you bought anywhere near the top of a market, you likely quickly became underwater on your mortgage.
So, should you rent? It depends on your market. For example, you can rent a 1,500 square foot home in Spokane, WA for $1,150/month. You could also buy a similar home for $165,000. Assuming you put nothing down on the latter, an online calculator that projects property tax, insurance and PMI will spit out a monthly mortgage figure of around $1,050. After maintenance expenses, you’re probably at roughly the same monthly amount for housing. However, the extra benefits mentioned above make it worth it to buy, not to mention the impact a flat mortgage payment can have on your financial independence number.
On the other hand, a 1,400 square foot townhouse in Ballard (a nice neighborhood in Seattle) costs $2,750/month. A similar townhouse down the street with the exact same specs also happens to be listed for $835,000. Using the same mortgage calculator, we’ll find that the monthly mortgage payment on this house would come out to over $4,500! Clearly, renting makes way more sense than buying in this area.
So rent vs. buy isn’t as clear cut as it would originally appear. It heavily depends on your market. That said, a recent development lets rent proponents tug a little bit harder on their side of the rope: the Tax Cuts and Jobs Act. Since enactment, the standard deduction has doubled from $12,000 if you’re married to $24,000. And if you’re single, it’s doubled to $12,000. What does this mean? It means that the old line of reasoning “you should get a mortgage because you can deduct your interest” is moot for the vast majority of people. In the past, your itemized deductions might have added up to beyond the standard deduction and this would include your mortgage interest. Today, your itemized deductions likely won’t come close to the new standard deduction. Of course, there are exceptions (high tax states like Illinois, for example) but for the most part, you will not pay any less in taxes by having a mortgage instead of a rental.
But does this sway the general rent vs buy needle towards rent? I’d argue no. The principal payoff, appreciation, and inflation hedge (which again reduces your FI number without increasing your risk) still makes owning a home more beneficial in most markets (unless you’re in a HCOL market like Seattle).
Even though home-owning proponents have lost one of their most pivotal pieces of support in the debate on owning vs renting, they still will generally come out ahead. So do the math for your own market and see which option makes the most sense for you. You might not be able to benefit any longer from deducting your mortgage interest, but chances are you’ll still be in a great spot as a homeowner.