When financial hardship strikes, renters believe they have more options than homeowners. On the surface, it makes sense. After all, it’s easier for renters to downsize into a more affordable home, move to a more affordable city or even move in with their parents or family.
But do renters really have more flexibility and options than homeowners? Or do homeowners have some aces up their sleeve that they might not be considering? Let’s take a look.
Let’s start this discussion with a basic assumption: You’ve been struck by some financial hardship and want to move out of your current home, which now costs more than you can afford. You’d like to downsize, or move-in with family. As a homeowner, you’ve got some advantages:
- No Limits on Moving Dates
When you rent, you’re stuck with a property until the lease term expires (unless you want to incur penalty fees for breaking the lease early). When you own your home, you’re welcome to list it at any point. As Bobby and Britney say, it’s my your prerogative.
- Rental Income
Depending on the size of your home, you may be able to solve your financial problems by turning some of your unused space into a rental property. Maybe you can convert the basement into a full-sized apartment, or rent out a guest room to a college student who’s willing to share common rooms like the bathroom and kitchen. As a homeowner, the choice is yours—you’re not limited by any lease terms.
- No Drastic Price Increases
If you’re a renter, your landlord can suddenly increase your rent by as much as he wants. But as a homeowner, your mortgage rate will probably stay as-is—especially if you have a fixed-rate loan. Yes, your property tax rates or insurance rates might go up, but they’re unlikely to rise as drastically as the type of increase a renter might face.
- Ability to Refinance
Depending on your overall financial state, your equity in your house and any capital improvements you’ve made to it, you may be able to qualify to refinance your mortgage. This can drastically reduce the amount you’re paying per month on your mortgage or allow you to pay it off faster, giving you a little extra breathing room if things have gotten tight.
But homeownership isn’t all roses. You suffer from some disadvantages that renters don’t face:
- Sitting on the Market
Sure, you can list your home at any time, but there’s no guarantee it will sell quickly. You may find yourself stuck with your property for months, or even a year or more, digging you deeper in the hole as you continue to make mortgage payments.
- Sunk Costs
Most homeowners make improvements to their homes in the hopes that they will increase the value of their property when it comes time to sell. But if you find yourself needing to vacate your home suddenly, you may not be able to get the full return on your investment. For instance, if you’re forced to sell during a “buyer’s market” or at a time when lots of other properties in your neighborhood are for sale, you may not be able to command the same asking price for your newly-renovated kitchen that you would have in a better market.
- Short Sale Risk
If you need to sell your home when you’re “underwater” on your mortgage (meaning that you owe more than the house is worth), you could face some serious trouble. Short sales can take a long time to close, can tarnish your credit score, and can stick you with a huge income tax bill. (The loss that your lender incurs will count as taxable income.) This can harm your ability to buy another home in the future.
- Closing Costs
When you sell your property, you’re faced with closing costs, which can chip anywhere from 4-7% off the overall sale price.
- Downsizing Can be Harder
Going from a good-sized apartment into a smaller place can be a hassle, but the relative difference in space may not be a big deal. But the amount of stuff we accumulate tends to fill whatever space we have for it, so going from a single-family house into a smaller apartment can require some major work on your part. You may need to sell furniture or invest in a storage unit for your overflow.
Considering all of this, renters face some unique financial advantages over homeowners:
- Fewer Maintenance Expenses
When you own a home, you’re not just responsible for the mortgage and utilities—you’re responsible for maintaining and repairing everything from the plumbing to the roof to the yard. If something breaks when you’re already on shaky financial ground, it could put you into a serious down-spiral. Renters, on the other hand, don’t face these unexpected (and potentially large) expenses, which makes renting a better option if you don’t feel secure in your future income or are living paycheck-to-paycheck.
- Less “Wait Time” When Moving
If you’re on a month-to-month lease, you can declare your intention to move out by the end of the month—unlike selling a home, which could take months, if not years, depending on how tough the market is. Even if you’re stuck with a one-year lease, you can often pay a penalty (usually around one month’s rent) and walk-away, which is a much more viable worst-case scenario.
But as a renter, you have to shoulder drawbacks, as well:
- Lease Term Limits
Many rental property leases set out a specific term of occupancy (typically a full year), at which point you have the option to renew or to move out. If you suddenly need to leave for whatever reason, you’re stuck facing penalty fees and could lose your security deposit for breaking your lease early.
- Limits on Rental Income
Depending on the terms of your lease, you may not be allowed to sublet or take on a roommate to help drum up some extra cash. A homeowner, by contrast, enjoys the opportunity to rent out a spare bedroom.
- Rent Increases
Unless you live in a rent-controlled area, your rent could go up at any time. If you’re a month-to-month renter, your lease might rise within the next 30 to 60 days. If you’re on a yearly lease, your rent could skyrocket at the end of your annual lease period.
In the End
Bottom line: There’s no clear-cut “right” answer about whether homeowners or renters enjoy greater flexibility. Think about the pros and cons, and decide which risks and rewards fit your situation.