Which is best: renting or owning?

Q:  June, do you think it is better to rent or own?  I have read several articles on-line stating your money is better off in a 401k or some other portfolio than in real estate/owning a home.

-Don, Md.

A: The old saying “timing is everything” is especially relevant to your question of renting or owning.  There are definitely points in all of our lives where renting makes all the sense in the world.  To name a few, these include times when:

• employment is uncertain or job security is lacking
• you will be in a particular location only for a few years
• your proverbial ducks are not in a row (for example, when a mortgage payment doesn’t fit into your budget, you don’t have an emergency reserve, or you have no down payment or “move-in” fund)

On the other hand, owning a home is the original American dream!  In the right circumstances buying your home can allow you to build equity over time, potentially benefit from tax deductions, and ultimately know that the roof over your head is not contingent on anyone else’s whims or rent demands.  So, do I think you should use retirement vehicles like a 401(k) to build a robust nest egg for retirement—yes!!  Do I think owning a home is a good thing under the right circumstances—yes!!  The bottom line is that regardless of where you live, you should be saving for your financial security and retirement.  The decision to buy a home should be based on your own specific financial situation and outlook.  If the time is right, there’s more than enough room on your plate for a 401(k) and a home! 

Comments

[martin Robinette]

Don,

You raise an interesting question. A question that I think many people in the military struggle with. As a fellow member of the military (Active Army) I received a housing allowance when I lived off post. I could use that allowance to either pay rent, or pay a mortgage. When I pay rent, I am not building any equity in my home but I am building equity for the home owner and there in lies the rub. I can go twenty plus years in the military bouncing between rental homes or living on post and in the end have nothing to show for it. While my brother (a civilian) can live in the same house for twenty years and build equity. After twenty years we have both paid the same amount into our homes. However, he has a home that is paid off and I have nothing but a lot of stories about the places I have lived. Granted, my stories are good, but a home that is paid off seems a lot more comforting.

Don’t let this get you down, there are some alternatives. As mentioned before, the longer you plan on staying in a home the better chance you have of building some equity. Home loans are designed for you to pay most of the interest up front. That means that your first few years of payments will be going mostly toward the interest. The long term home owner, however, will see a better return. The real question becomes how can a service member build equity when they are constantly moving. Well, I think it can be done it two ways.

First, you can simply look at your housing allowance as “non-spendable money” or as your “future home” and save all of it. That means that you will need to pay rent out of your basic pay and may need to rent a smaller home. That can be hard now but really pay off in the future when you buy your home outright.

The second way to build equity is to buy a home now and rent it out when you transfer. The renter will be paying your mortgage and building your equity. If you keep the home long enough for it to be paid off, the rent payments can also go into your savings or spending cash. I know several people who buy a home at each duty station and then rent it out when they transfer. Of course there are drawbacks to this plan as well. You will be responsible for repairs to the home and will usually have to pay a service fee to a rental company to manage your home. If you buy your home with a VA loan you will not be able to use the VA loan again until the home is paid off. You should talk to your VA representative for more details.

All things considered, the military is good about taking care of its members housing needs. It provides free on-post housing or a housing allowance to rent/buy a home off-post. It is up to us to use those resources wisely so that we can plan for our future financial and housing needs.

Good luck,

Marty

MAJ Martin Robinette
Student, Command and General Staff College
U.S. Army Combined Arms Center
Fort Belvoir, Virginia

The views expressed in this Blog are those of the author and do not reflect the official policy or position of the Department of the army, Department of Defense, or the U.S. Government.