I’m surprised when I read articles with titles like “the “hidden costs of homeownership.” I’ve come to find most of these articles are useful reminders to current renters not familiar with all of the costs that go into housing. However, some authors have used the “hidden costs of ownership” theme as an argument against homeownership. I find this conclusion misleading and incorrect. In truth, even with “hidden” costs, homeownership is not more expensive than renting.
The Fallacy of “Hidden” Costs to Homeownership
The idea of “hidden” costs to homeownership is a concept that I don’t understand. In reality, it is renting where costs of housing is unknown and the ignorance of costs caused by rent prices tends to lead renters blindly into homeownership. So, to be fair, the problem is really the “hidden” costs of renting.
What Goes Into Rent Prices?
Renters are familiar with some housing costs like electric, heating and insurance. However, most costs associated with housing are rolled up, mysteriously, into a single rent price. It means that renters pay all the same costs as homeowners, they just don’t know about it. Some costs are exactly the same.
If you rent a whole house for example, your rent will reflect all the exact same costs that a homeowner faces. Repair, maintenance, taxes and utilities are all included, just not explicitly. One difference is that you will also need to pay extra as a renter for the landlord to make a profit. Are multi-unit apartments cheaper on costs?
There are two types of costs for multi-unit apartments. Anything inside your apartment is a variable unit cost. Those costs, which are rolled up into your rent, are no less or greater than the costs you’d pay as a homeowner. These costs include indoor maintenance to sinks, faucets, bath fixtures, refrigerator and stove.
Where costs differ is with fixed unit costs. Most of anything outside your apartment would be a unit fixed cost like roof, siding and lawn maintenance. These costs are shared between you and the rent of other tenants. If there are three apartments in a house, then the costs of repairing the roof is split between the rent prices of you and the other tenants.
While there might be a small cost advantage to unit fixed costs, ultimately the landlord needs to earn a profit. One reason why multi-unit dwellings are so popular is that property owners can take advantage of the efficiency of unit fixed costs so that they can earn more return. So, while your landlord can benefit from low unit fixed costs, it is not a guaranteed that the benefit passes to tenants.
As I mentioned, what is good about posts written about the “hidden” costs of homeownership is that that they point to a common mistake made in the buy versus rent decision. Most renters compare their current rent costs to their mortgage payment. If you do this, you are in for a big surprise. There are many other costs that do need to be considered as a homeowner, but don’t be fooled into thinking that homeownership is somehow more than renting.
To illustrate, I want to do an apples-to-apples comparison of rent cost to homeownership costs. To do so I picked one apartment that is roughly the same size and location as a condo for sale. Both have 2 bedrooms and 1bathroom. Likewise, both are units in a larger complex. I picked a condo because homeowner’s associations essentially take care of the unit fixed costs so that all we have to worry about is the variables. The buildings are near to my own home so that I could use some of my own costs as estimates for the condo. They are in a suburb just outside a small industrial city.
When we run this comparison, I expect homeowner to be at least, slightly cheaper. That’s mostly because I can’t account of all of the minor costs of homeownership, which won’t change costs dramatically, but would inevitably make it more expensive than I can account for.
Here are some facts and assumptions:
- The apartment’s rent is $885/month
- The condo is selling for $69,000
- I’ll assume a 30-year mortgage at a rate of 4.125%, which is what it was this morning at my local credit union
- Average closing costs of $3,024/360 = $8.40/month
- Taxes and HOA fees total $1,761 per year according to Zillow
- I’m going to assume that the homeowner put down a full 20% down payment ($13,800) and does not owe PMI. Perhaps renters will think this is unfair, but honestly, homeownership has an advantage in that you have the ability to lower your monthly housing costs. If you don’t like it, go be a homeowner. Besides, PMI probably will not make homeownership more expensive than renting.
- Insurance increases by $20/month (very generous increase)
- I’m going to guess that the water/sewer bill for the condo is the same average as my own $185/quarter
- Roofing, siding, and yard maintenance are already part of the HOA fee
- Electrical/heating is not included in rent. Since both will pay the same, it is excluded.
- Let’s assume that the condo owner will own for 30 years and needs to replace each of the following twice:
- Oven – $350 x2 = $700
- Refrigerator $400 x2 = $800
- Hot Water Heater = $450 x2 = $1,000
- Bathroom Fixtures = $1,250 x2 = $2,500
- Furnace (this is only 900 sq ft BTW) = $5,000 x2 = $10,000
- Total = $15,000/360 (months) = an additional $41.66 per month
Take note that the “hidden” costs of maintenance, spread out over 30 years actually has little impact on monthly costs.
Based on this, the cost per month of owning the condo is:
- Principle and Interest: $267.53
- Taxes and HOA: $146.75
- Insurance: $20
- Amortized Closing Costs: $8.40
- Maintainance/Replacement: $41.66
- Water/sewer: $61.67
- Total monthly costs: $546.01
- Difference to Renting: $338.99
Even assuming no down payment and PMI, I highly doubt that homeownership would come anywhere close to the costs of renting. However, I do want to take this one step forward by asking, how much “hidden” costs of homeownership would need to be discovered, in addition to what I’ve already listed, to make homeownership equal to renting?
To do so, we multiply the difference of $338.99 by 360 and come to $122,036.44 over 30 years, or nearly twice the purchase cost of the condo!
The Problem with Going from Renter to Homeowner
I wanted to setup a scenario of comparing ownership and renting, where everything was comparable. The problem is that renters rarely look for housing in parity with the apartment they have. My wife and I went from a 650 square foot one bedroom apartment to a 3,800 square foot six bedroom house. That’s a change in living space that cannot be equated. However, my mortgage (taxes and PMI included) only increased by 33% over my rent. While my square footage of living space multiplied by about 6 times, I can assure you that my total costs did not increase by the same.
So while renters do need to be warned about costs they did not consider in the buying a home equation. It’s important to point out that homeownership is definitely cheaper and if you are looking for a home with similar costs, you should be able to increase living space.