Everyone knows owning a home is a significant financial move. Owning home equity contributes to your assets. It’s also one step closer to financial freedom. On the other hand, renting looks like a pure expense. So let’s examine how much you’re losing just by paying rent alone.
An average family pays over $9,400 each year for rent alone. Often, it doesn’t fall within the 30% ideal rent-salary proportion. That’s right; the perfect expenditure for rent shouldn’t exceed 30% of your income. It might appear more affordable in the short term, but you’re losing money in the long run. Let’s try to understand why this is the truth and the bane of renting.
Rent Can Increase Without You Knowing
The first thing to consider is that rent is not that stable. Your landlord can increase rent at any time. In areas where no rent control exists, nobody can tell how much you’re going to pay. In addition, the property owner can increase rent for various reasons, and sometimes they’re not always reasonable.
Why Do Landlords Increase Rent?
The first reason on their bucket list is to keep up with market demand. The local real estate market evolves because of the local economy and demand for land and housing. So when the economy is good, the chances are that real estate values go up, too. This is especially the case with properties in good locations.
You can quickly tell when a property is at a good location. Just look at the surroundings. Is there a booming business forum? Are there new buzzing new and old shops? What facilities and amenities are there?
You can even tell that the location is good if there’s an active community. For example, people organize themselves to keep the neighborhood clean. There exists a neighborhood watch, and people respect and care for each other. These things make a good location, which also means higher value for real estate properties in the area.
Once the landlord gets wind of this, they will likely increase the rent to correspond with the increase in the property’s value. After all, demand for land and housing in good locations always tends to increase.
The landlord may also increase rent for neighborhood enhancement. The money could be used to build facilities and amenities or aid in more developments around the area. A rising local economy, new employers, and property improvements are sure to make the rent go higher.
You Don’t Earn Home Equity
The saddest thing about rent is that it is only what it is, rent. It’s not earning you home equity. You’re not building an asset. Paying rent means you’re only spending and not investing.
The craziest thing about renting is that the amount you paid for rent could have been paid for the mortgage instead. Getting a home loan is better than renting because you increase your home equity as you pay. You are investing in an appreciating asset.
One day, its value is going to rise way above what you originally paid. The month amortization doesn’t even change throughout the years. So you could earn more, but the monthly mortgage payments remain the same unless the terms and conditions of the mortgage say otherwise.
Imagine paying to own your place. When you rent, you can’t even make renovations freely. Even when you do, you’re not going to get most of the value of the home improvements you’ve made. Instead, the property owner benefits from increasing the property’s value due to the upgrades you’ve done. Likewise, when you buy a house, the improvements you make in it allow you to increase your home equity and amass wealth.
When you rent, you don’t have free rein when designing your home or decorating it. For example, you can’t paint it with the color you like if it’s against the terms and conditions of your lease. More often than not, you’re going to come to face some miscommunication and misunderstanding with your landlord.
But let’s assume that you are allowed to renovate as much as you wish. It’s true that you now enjoy the property as you would like to, but you’re not getting its value. The value of your renovations goes to your landlord.
In other words, when you invest and improve your rented place, you’re watering somebody else’s garden. You’re losing money just so somebody else’s property becomes more appealing and functional. It might even eventually increase the rent because the property has become more attractive. When the demand goes high, so does the rent.