When people are making the own-vs-rent analysis, they typically compare the monthly payment involved in owning a home—principal, interest, taxes, and insurance, or “PITI”—next to what it would cost to rent the same home.
But what that analysis ignores is that it’s not all about monthly payment. In fact, it isn’t even about the income tax deduction you’ll receive as a homeowner. Homeownership can impact your bottom line in major ways, often ways that you forget to account for.
In fact, homeowners should budget for at least 30 budget items that renters don’t need to worry about. These items can amount to many thousands of dollars per year, and literally tens of thousands of dollars over a decade.
What are those expenses, and how might they impact your buy-vs-rent decision?
1. Opportunity Cost on Your Down Payment
This is an invisible cost that is almost universally ignored by homeowners. But the money that you are putting up as a down payment on a home is money that won’t be available for investment.
Let’s say you are purchasing a home for $250,000 and plan to make a 20% down payment of $50,000. If you could earn 7% on that money in a blended portfolio of stocks and bonds, it would amount to $3,500 per year, or nearly $300 per month. That’s income you won’t have if you decide to use the money for your down payment.
2. Closing Costs
These typically amount to roughly 2% of the cost of a home. Again using $250,000 as the purchase price, you should budget about $5,000 up front to pay these costs. Closing costs include lender charges, attorney fees, transfer taxes, property appraisal, and various other fees.
3. Real Estate Taxes
To be sure, renters are not immune from real estate taxes. They’re at least loosely included in the cost of rent. But the arrangement between owner and renter is not equal. The owner must pay the real estate taxes, while a renter will only pay them if they fit neatly within the rent they’re paying for the property.
For example, in the event that the local tax authority increases real estate taxes by 10%, the owner won’t be able to pass that increase on to the tenant immediately, especially if that would increase rent beyond what the market in the area will bear. Homeowners, on the other hand, can’t avoid paying that additional 10% in property taxes as soon as they come due.
4. Homeowner’s Insurance
Renters should pay renter’s insurance, and, in fact, many landlords require renter’s insurance. But since this insurance only covers contents and not the structure of the building, it is only a fraction of the cost of homeowners insurance. For example, while the homeowner may have to pay $75 per month for homeowners insurance, a tenant may pay only $15 per month for renters insurance.
5. Homeowners Association (HOA) Dues
These represent another often unrecognized carrying cost for a homeowner. A renter may pay association dues as part of the monthly rent, but, again, how much the renter will be paid will be limited by market rent factors. Homeowners, on the other hand, just have to fork over the fees set by the HOA.
6. Flood or Earthquake Insurance
If a home is located in either a flood zone or earthquake zone, the homeowner must obtain a separate policy to cover these hazards. These hazards are not covered by standard homeowners insurance policies. Depending upon how prone an area is to flooding or earthquakes, this additional insurance can cost several thousand dollars per year.
Again, the renter does not have to bear this expense, and it may not be possible for a landlord to build it into the monthly rent either (once again, due to market factors).
7. Special Assessments
Every now and again a community or a homeowners association takes on a certain project and passes the cost onto homeowners. Such projects can include repaving parking lots, replacing the roofing on common buildings, building a new school, or installing new sewer and water lines. The homeowner will pay these as special assessments. However, renters aren’t responsible for these one-off levies.
8. 100% of the Utility Costs of the Home
When you own a home, you have to pay all utilities on the property. This includes heat, electricity, water and sewer, and trash removal. Renters, on the other hand, often have at least some of these expenses paid as part of the rent. For example, the rent may include water, sewer, and trash removal, making overall utilities cheaper for renters. Plus, renters in multi-family properties may realize savings because the water for the whole building, for instance, is metered together.
9. Lawn Maintenance
If you’re renting a detached home, you may or may not be responsible for lawn maintenance. And if you are renting an apartment or condominium, it will not be your responsibility. But if you own a home, you’re completely responsible for the upkeep of your lawn. This includes either paying the time, effort, and costs of doing the work yourself, or paying someone else to do it for you. Condominium owners may not be directly responsible for lawn maintenance, but they may have additional fees associated with these services for the condominium community as a whole.
10. Snow Removal
The arrangement here is identical to lawn maintenance, but the costs can vary significantly depending upon the amount of snow that you receive.
11. Fall/Spring Clean-up
Ditto. Except that the cost of the cleanup can vary substantially. For example, if you own a home that is on a property with significant vegetation, it could cost you hundreds of dollars each year to do spring and fall cleanups. Some communities even charge extra to remove leaves and other debris from your property.
If you’re a homeowner, it will fall on you to keep your home maintained and painted. You can always do the job yourself, which will keep the cost to no more than a few hundred dollars. But it is a major project and highly disruptive, so you may want to pay someone else do it for you. It can cost thousands of dollars to have a professional paint a standard house.
A renter may have the option of painting the interior walls of a home or apartment, but they won’t have this responsibility.
13. Cleaning Gutters and Downspouts
Similar to lawn maintenance, a renter may have to do this on a detached home but not with an apartment or condominium. An owner has no choice. And since cleaning gutters involves climbing a ladder up to the roof, it’s a job that is often better left to the professionals. That can add hundreds of dollars each year to the cost of home ownership, since gutter cleaning often needs to be done at least a couple of times each year.
14. Tree Removal
If a tree is rotting on the property and needs to be removed, a renter simply calls the landlord. But the owner has to remove the tree. Since this is a specialized and very hazardous job, it’s nearly always best to let a professional do it. Tree removal can cost well over $1,000 for just one tree.
15. Pest Control
A renter almost never has to pay for pest control. An owner, on the other hand, always has to pay for it. It can cost several hundred dollars per year for pest control maintenance, and at least several hundred more if you need to get a termite bond for the property.
16. Code Compliance
Should the local community chieftains decide to upgrade requirements for your furnace or hot water heater, you will have no choice but to comply. A property that has code violations can be subject to fines, and cannot be sold to another party until the violations are corrected. Compliance can cost anywhere from a few dollars to many thousands.
17. Garage Door Opener Repair/Replacement
Garage door openers are a marvelous invention, especially when the weather is bad and you don’t want to get out of your car into the rain or snow. However, garage doors openers are mechanical devices subject to intense stress. Sooner or later they malfunction or snap, and they have to be either repaired or replaced. Either operation will cost several hundred dollars.
18. Home Security System Repair/Replacement
This is not necessarily a large expense, but it is one of the most unfair in regard to owners versus renters. An owner must pay for the installation, maintenance, repair, and eventual replacement of the security system. A renter will have full use of the system, but not have to pay anything more than the fees required to keep the system operating.
We’ve got a long list below of components and systems that will need to be repaired or replaced. But periodically, most homes have to undergo substantial renovation. This is particularly true of component-heavy rooms such as the kitchen and bathrooms.
It may only have to be done every 15 years or so, but when it’s needed, renovation can cost many thousands of dollars. Sure, you can do the work yourself, but disrupting these rooms in particular has great potential to upset the flow of your daily life.
This is a major expense that a renter will never have.
20. Appliance Repair/Replacement
Apart from periodic renovations, appliances do break down every so often. This can include a stove, refrigerator, or dishwasher. Should they break down, a renter can always call the landlord. But if you’re an owner, it will fall on you to repair or replace the item.
This could easily add $500 to $1,000 (or more) to the cost of home ownership, per replacement.
21. Furnace Repair/Replacement
Like appliances, a furnace needs to be repaired every so often. And every few years, it needs to be replaced. A repair may cost you only a few hundred dollars, but replacement of the entire unit can cost thousands. Sooner or later, an owner will have to pay that cost. A renter never has to.
22. Air Conditioner Repair/Replacement
This is the same situation as a furnace. An air conditioner will need to be repaired every so often, and eventually replaced. A homeowner must pay the cost, a renter never has to.
23. Driveway Repair/Replacement
Driveways eventually crack and fragment. While repairs can be done inexpensively through coating and patching, total replacement of the driveway can cost several thousand dollars. It may happen only once every 20 years, but it is a long-term cost that cannot be ignored.
24. Roof Repair/Replacement
Sooner or later a roof will spring a leak. When it does, a renter can call the landlord. But an owner must bear the cost of the repair. And roughly every 12 to 15 years a roof needs to be completely replaced. It can cost at least $5,000 or $6,000 to replace a roof on a simple, modest home, and much more on more elaborate homes.
25. Siding Repair/Replacement
This is not a universal expense, as it tends to occur primarily in areas that have extended summers and a lot of moisture. That combination will eventually wear out wood siding, especially the composite materials that are so common in home construction today.
Many people never have this expense, but for those who do it can literally cost tens of thousands of dollars to replace the siding on your home. Should you face that problem, you’ll probably wish that you were a renter.
26. Window Repair/Replacement
Much like siding issues, windows are not a problem across the country. But there are certain regions where windows are prone to rotting and will need periodic repair and eventual replacement. Repairs can cost a few hundred dollars, but replacement of many windows can cost thousands.
27. Carpet/Flooring Replacement
Carpets or any kind of flooring will eventually be in need of major upgrade. This can include refinishing wood floors or the complete replacement of carpets. This will have to be done every few years, and it will cost several thousand dollars when it is time to complete this renovation.
A renter is typically responsible only for periodic carpet cleaning. But as an owner, you will eventually face the costly replacement situation.
28. Hot Water Heater Repair/Replacement
These tend to be highly reliable, and don’t require a lot of ongoing maintenance. But eventually they will have to be replaced, and that can cost anywhere from several hundred dollars to several thousand dollars, depending upon the units that are required in your community.
29. Plumbing Repair
It’s very rare that the plumbing in a house needs to be completely replaced, and when it does you’re usually aware of when you buy the home. You may even factor that cost into the purchase price of the home. However periodic repairs will be necessary. These can cost anywhere from a few hundred dollars to a couple of thousand dollars. And again, this is an expense that a renter does not have.
30. Electrical Repair
This is very similar to plumbing in that while it will require periodic repair, it’s not likely to require replacement. Still, as an owner you will pay the cost of those repairs. And that’s a cost that a renter will not have.
Summing Up Budget Items for Homeowners
If you’re facing the buy-vs-rent decision, you should factor all of these costs into your analysis. While it’s impossible to produce some sort of rule-of-thumb number to use as a general estimate, you should consider the degree to which each of these expenses will impact your cost of home ownership.
These costs vary based on the size, age, condition, and location of the property that you want to purchase. You may also want to consider your ability to do much of the work yourself. Obviously, if you aren’t adept at repairs, you will pay the higher cost of having professionals do the work.
Aspiring homeowners usually ignore these expenses, which is easy enough to do when you first become a homeowner. But over time, each of them will surface, giving you a glimpse of what ownership really costs.
You can be a fully informed buyer, though, if you make some attempt to factor these expenses into your buying decision. On analysis, you may discover that renting isn’t so bad after all.