Another month of number crunching! Understanding the cash flow dynamics of renting versus owning is crucial before you set out to buy a house. Again this is purely looking at the numbers and not considering other very important things like the safety and desirability of the living situation. This piece of information was especially vague to me when I was researching so hopefully this gives a glimpse of what things may look like in reality.
Renting an Apartment
When it comes to renting, monthly cash outflow is pretty straightforward.
Rent: This is the biggie and is the main cash outflow. It covers our living space, parking spot, amenities, and the convenience of not having to worry about property taxes or maintenance.
Utilities: For us this was just electricity since water was included in rent.
Rental Insurance: This was optional in our last rental place but we got it for peace of mind. It’s also not a terribly expensive plan.
Owning a House
Now there’s a lot more to breakdown….
Mortgage: This includes the principal, interest, and escrow (for insurance, taxes etc.). Because we’re only at Year 1 of our mortgage and we put only 3% down, only a tiny portion of our current mortgage is going towards principal.
Home Insurance: Pretty straightforward and could vary depending on your location and home type/building material. I probably could get this cheaper if I had shopped around but we were in a time crunch and decided to bundle our home and car for ease of management.
Utilities: This includes electricity, water, and wastewater. Honestly seeing the initial bill is a bit of a shock because I was so used to just paying for the electric.
Maintenance: So far, we’re doing regular pest control, termite control, landscaping, and appliance servicing. Arguably we could do the pest and termite control on our own for much cheaper but outsourcing is the best option for us based on the amount and variety of insects we see. We’re doing minimal landscaping and doing the majority of the work ourselves but there is still material and equipment cost to it. The initial equipment cost was also a doozy. We bought some big appliances (washer, dryer, fridge) and got the annual servicing plan. Servicing is going to be done once a year and I had spread that cost over 12 months.
The Bottom Line: Renting vs. Owning
So looking purely at cash outflow renting is definitely a “cheaper” option even as I gripe about the continuous rent raises. It’s simpler upfront and fewer surprise costs compared to home ownership. While I fully expected the increase in monthly cash outflow after buying a home, I was still floored by the 70% increase. Even though we had wiggle room in our monthly spend, we ended up having to make adjustments in our lifestyle and investment strategy to accommodate this increase.
There are, of course, financial benefits of homeownership that I’m not counting in here like tax deduction for mortgage interests, property value appreciation, etc. I’m not really considering them in this number crunching because, quite frankly, they don’t impact the cash outflow that needs to be managed on a monthly basis.
Hopefully this doesn’t come across as a deterrent to homeownership. Depending on the market/location, owning may actually result in lower cash outflow than renting. What’s important is having a realistic idea of what your monthly cash outflow could be for so you can make a decision that you’re happy with.
FIRE on the way 