Essay Sample on Renting vs Buying

Published: 2023-04-05
Essay Sample on Renting vs Buying
Type of paper:  Essay
Categories:  Analysis Money
Pages: 4
Wordcount: 1023 words
9 min read
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There has always been a passionate debate about renting or buying a home issue (Ball 17). The primary factor in the debate is which of the two makes more financial sense (Ball 17). Financial advantage is significant when it comes to an individual's assessment of whether to rent or buy a home. A person should also consider all the advantages and disadvantages of renting or buying a home before deciding what to do. Comparing the benefits, buying a home has more financial sense. Buying a home builds equity over time, grants the homeowners tax benefits, opens an opportunity of earning extra income by renting part of the home, provides more creative freedom, and gives the homeowners a sense of belonging and community as compared to renting a home.

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Building Equity Over Time

Homeowners build equity over time as compared to renters (Beracha, et al. 273). Every dollar paid by the homeowner represents an increase in equity. Building equity is beneficial to homeowners when it reaches 20% or the loan to value (LTV) hits 80% (Oliner et al. 54). The homeowner can use it to get a home equity loan or refinance their mortgage and secure a lower interest rate or a longer repayment period. Renters have no opportunity in achieving such a benefit. Also, homeowners can lower their loan to value and improve their home value through judicious investments in home improvements (Quercia et al.,315). The improved home value becomes an investment when the homeowner later decides to sell the home.

Conversely, renters cannot build equity over time unless they are party to a rent-to-own agreement. Under a standard lease agreement, a tenant cannot build equity for the building they have rented. Regardless of how long a tenant has stayed in the same rented house, they still do not have a chance to build equity in the property. The best option for an individual who wishes to stay in the same location for a substantial amount of time would be to buy a home in that location.

Tax Benefits

Most homeowners but not all qualify and enjoy several tax benefits. The most prominent taxes are homestead exemption and federal tax deductions.

Homestead Exemption: Many states in the United States exempt homesteads from a portion of the accruing property tax burden. A good example is Louisiana, which exempts the first $75,000 of a home's value from property tax assessments (Walczak).

Federal Tax Deductions: By including it as an item in the federal income taxes a homeowner can deduct his or her property tax and the interest paid on their mortgage. This deduction leads to a substantial overall income tax and it particularly benefits individuals in higher tax brackets.

Unlike homeowners, renters are not eligible for any housing-related tax benefits. They are thus at a disadvantage of paying more federal income tax by several hundreds of dollars per year compared to their counterparts.

Potential for Rental Income

Homeowners have a chance of turning their homes into a source of income. They can rent part or all of their property given they follow the right local rental property law (Needham et al. 69). Another way for earning income from their homes is by taking short-term renters via Airbnb, Vrbo or any other house-sharing platform (Wegmann et al. 497). The homeowner can use the rental income to offset their mortgage, tax and insurance payments. On the contrary, a tenant cannot convert their rented properties into a source of income by renting either part or all of it.

Creative Freedom

Homeowners have more creative freedom compared to renters. By buying a home a person answers to no one when it comes to his or her decorations and home improvement choices. A homeowner is free to do whatever they like with their homes provided that they uphold local building codes or homeowners' association rules. They enjoy this freedom by changing their living environment to suit their urges. The situation is different for tenants who cannot change the setting of the properties they have rented since they do not own them.

Sense of Belonging and Community

Buying a home offers homeowners a likelihood of settling and building roots in their communities. The likelihood is that they stay in their homes for longer than tenants. Homeowners can do this in different ways like joining a local neighborhood association, volunteering at a nearby community center, joining a school group, or aligning with a business improvement district. Through such activities, they obtain a sense of belonging and attachment to their community. The scenario is contrary when it comes to renters more so those who know that they are to stay in the location for a short time.

Trends in Renting and Buying Homes in the United States

Trends in renting and buying homes in the United States have been changing due to factors that affect individual decisions. According to Chart 1 below, the rental vacancy rate has declined in the united states. The same is illustrated in Chart 2, where the homeownership rate has also followed a steadily declining trend. This does not affect the discussion above that buying a home has more benefits than renting a home as the trends are affected by the financial crisis and less interest of younger generations to live in the suburbs.

Chart 1: Rental vacancy rate for the United States. Retrieved from https://fred.stlouisfed.org/series/RRVRUSQ156N

Chart 2: Homeownership rate for the United States. Retrieved from https://fred.stlouisfed.org/series/RSAHORUSQ156SWorks Cited

Ball, Michael. Housing policy and economic power: the political economy of owner-occupation. Routledge, 2017.

Beracha, Eli, Alexandre Skiba, and Ken H. Johnson. "Housing ownership decision making in the framework of household portfolio choice." Journal of Real Estate Research 39.2 (2017): 263-287.

https://fred.stlouisfed.org/series/RRVRUSQ156N

https://fred.stlouisfed.org/series/RSAHORUSQ156S

Needham, Barrie, Edwin Buitelaar, and Thomas Hartmann. Planning, Law and Economics: The rules we make for using land. Routledge, 2018.

Oliner, Stephen D., Tobias J. Peter, and Edward J. Pinto. "The wealth-building home loan." Regional Science and Urban Economics (2018).

Walczak, Jared. "State inheritance and estate taxes." Tax Foundation, July (2017).

Wegmann, Jake, and Junfeng Jiao. "Taming Airbnb: Toward guiding principles for local regulation of urban vacation rentals based on empirical results from five US cities." Land Use Policy 69 (2017): 494-501.

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