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Renting an Apartment Compared to Owning Your Own Home

By Editor • Jun 15th, 2010 • Category: Advice

Conventional wisdom has long maintained that owning your own home is a way to build equity and develop long term wealth. Historically there have been a few main factors that have tilted the benefit towards home ownership versus renting a home or an apartment, they are:

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Mortgage Interest Tax Breaks
Depending on the tax bracket you fall into, you can save up to 1/3 of your mortgage interest on your federal taxes. For example, if your mortgage is 6% then your effective mortgage interest rate is 4% after you deduct the mortgage interest expense. This low effective rate has been a powerful reason home ownership levels have improved dramatically from the 1950’s to the mid 2000’s.

Using Debt as Leverage
Home prices have appreciated between 3% and 8% over the last 50 years depending on the city you live in. Now if you only put 20% down on a $300,000 house, you had to only invest $60,000 of your money, yet you are getting a return on the $300,000 house price. So say you are getting 3% the first year then you made $18,000 on your $60,000 investment so you had a percentage return of 30% in your first year – not bad at all.

Relaxed Lending Standards in the 2000’s
Many people were able to get loans to buy a house that never would have qualified 20 years ago. In the late 90’s and early 2000’s many lenders stopped requiring 20% down and sometimes gave out loans with as little as 1% or almost no money down. With very little skin in the game, people took bigger risks and accepted large loans that were more than they could handle. If you found a home you liked, there was no significant barrier to getting it, because you no longer had to save 20% of your money for a down payment.

Around 2007 Things Start to Change
Starting in 2007 and 2008, things started to change dramatically on the housing front. While the mortgage interest tax breaks remained, using debt as leverage started to turn on homeowners rather quickly. People that had put little money down went underwater rapidly when housing prices started to fall each year at about 10-15%. Most homeowners that bought in the last 3-5 years quickly had negative equity in their home and no longer felt like they had an investment.

Worse off were the people that decided to go for an adjustable rate mortgage. Many of these mortgages started off with teaser interest rates of 3-4% and then reset up to as high as 8% or 10% interest rates. The resulting change in the monthly payment was too much for many people to handle and foreclosures across the country rapidly increased.

People nationwide were frustrated and new homeowners stopped seeing their house as something that would make them money. It’s no wonder that many people turned to apartments and rental houses in spades. It felt much safer for many people to pay a set amount of money each month and not have to worry about making some major repair or fix that would cost a lot. In addition, by renting your place you no longer have to pay property taxes, which can add up to thousands and even tens of thousands a year, depending on the sate you live in.

Where Can You Rent?
With the internet, finding an apartment has never been easier. There are many large apartment finding companies like Apartments.com, Rent.com, MyNewPlace.com and many others. If you are particularly interested in low income housing then you should check out Low Income Apartment Finder where you can find thousands of apartments for rent.