August 11, 2006

The Eternal Real-Estate Question: Rent v. Own

RECENTLY, USA TODAY ran a story about homeowners who are selling their expensive homes in highly-priced real-estate markets and moving back into the rental market. In its story, the newspaper also profiles young people who are renting as opposed to owning, and so on.

Over at Boston Gal's Open Wallet, writer Jane Dough takes issue with the downsizing homeowners' strategy. She argues they're trying to time the housing market, a tactic she says is not all that bright:

While it may make sense in some cases to sell your home and downsize to a rental for economic reasons (going back to school, starting a business, etc.) generally I would not think this was a great idea. Personally I prefer the idea of being both an owner and a landlord. Owning a two family home seems like a way to hedge your bets against both the home owner market and the rental market. If more people are buying rather than renting, then your house appreciates. However, if more people are selling and renting, then your home may depreciate in value, but the amount you charge for rent should increase (since more people are looking to rent).

I am sure this is not a fool proof idea - but an interesting one to explore. What are your thoughts? Is the owner-occupied two family home the best way to get the best of both worlds (owning a home while getting the benefit of a renter helping you make your mortgage payments)?

For what it's worth, here's how I (as a long-term renter) see things.

Having a tenant in one's home is not for everyone. After all, as every landlord knows, tenants are an ungrateful and surly lot who play loud music at odd hours and take every opportunity to wantonly damage a landlord's investment. True, it is possible that, through some miracle, a landlord might find a quiet tenant who has a steady income, pays his rent faithfully and without fail, and whose sole hobby is stamp collecting. However, a landlord has a better chance of ending up with some ne'er-do-well deadbeat who consistently gives excuses as to why he can't pay his rent, and who will put up a fight when you try to evict him, and so on.

Yet for those who can stomach having a tenant and are handy, a tenant can add significant value to one's bottom line. A year's rental income can easily add up to many thousands of dollars, even net of taxes, in the nation's larger cities. That can be applied straight to one's mortgage. Paying down's one mortgage ahead of schedule should result in substantial savings on interest payments, allow one to own one's residence outright sooner, and alleviate the bite from property tax payments which would otherwise come out of one's own pocket.

I don't think one can or should view the issue as one of hedging, though. A Hong Kong property tycoon once summed up the real-estate market in three words: wait, wait, wait. Provied a homeowner doesn't use his home as a piggy bank, having a tenant will simply let him pay down his mortgage quicker, eventually leaving him in the clear and giving him the maximum freedom to do what he wants with his asset.

In that respect, there's no difference between one's home and an investment property one rents out. Investment properties also have advantages. In addition to rent payments (which would hopefully cover the property's PITI payments), investment-property owners can take advantage of certain tax provisions (e.g. depreciation rules, 1031 exchanges, and so on) that may make owning outside property a better play in the long run. But that would be a decision for which one ought seek professional advice.

Posted by Benjamin Kepple at August 11, 2006 08:58 AM | TrackBack
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