Rent Vs. Own: A Look at Our Expenditure Then, and Our Expenditure Now

No, this is not going to be yet another post on whether owning a house is better or if one should continue to rent. That issue has been discussed quite a bit in the finance blogosphere (links to some really good discussion in the “Related Articles” section at the bottom of this post). Rather, what I would like to do here is to provide a comparison of the expenditure we had while we rented and now when we own a home. Whether you want to rent or own, is your call.

Rent Vs Mortgage
Cost while renting: $685 per month.
Cost while owning a home: $986 (principal + interest) per month.
Explanation: During the time we rented, there were many new apartment complexes in our area and the rent was quite cheap. So, we could get a luxury two bedroom apartment with a fireplace, balcony, washer & dryer, covered parking etc., for an average of $685. The mortgage on our house was taken out when the interest rates were quite low and we managed to lock in on 5.125% for a 30 year loan. It’s a 2900 sq ft. two story house in a nice neighborhood and a good school district. (Very similar to the house in the picture).

Insurance Costs
Cost while renting: $0
Cost while owning a home: $900 per annum.
Explanation: When we rented, we were at first students and later the better half started working while I continued to be a student. We did not have anything that was of much value in our apartment, so we never bothered with renters’ insurance. But once we bought the house, we definitely had to get a homeowners’ insurance. One more thing to note here is that the number above does not include a PMI since we put down a payment of 20%. If you do not plan on putting a down payment, remember to account for PMI.

Property Tax
Cost while renting: $0
Cost while owning a home: $6200 per annum.
Explanation: Yes, that is outrageous! We live in Texas and the property taxes are very high to compensate for not having a state income tax. Nothing we can do about that :(

Cost while renting: $40 - $80 per month
Cost while owning a home: $60 - $175 per month
Explanation: Summers in Texas are brutal and you cannot live without the a/c being ON most of the time. So the electric bills in summer are significantly more than the electric bills the rest of the year. In our current house, we have a split a/c, ie a different unit for each floor, and we try to keep only one of them ON, whenever possible. Also, when we go to work we turn off the a/c and turn it back on when we return. But still, the electric cost for our house is much more than that we had in the apartment.

Cost while renting: 0 (included in rent)
Cost while owning a home: $75 - $120 per month
Explanation: The first month after we moved to this house we received a water bill of $195!!! Our jaws dropped open, especially since we didn’t even have a separate water bill while we were in the apartment! We later found out that when the house was on the market, the realtor had set the sprinkler to come on every day, so the lawn would look nice and green. And since we were busy with unpacking and settling in, and have never really lived in a house before where we had control over the sprinklers, we never even thought about checking it or changing it! Over time, we have optimized the sprinkler schedule as best as we can to reduce the cost. We still need to use it quite a bit though to make sure we have a lawn and not a hay-patch in our front yard.

Cost while renting: $20 - $40 per month
Cost while owning a home: $20 - $40 per month
Explanation: Both at the apartment and in the house, hot water uses gas and this was probably the only bill that remained similar to our old bills.

Furnishing Costs
Cost while renting: ~$2,000
Cost while owning a home: above cost + $3,500 (not quite done yet)
Explanation: We brought most of the furniture from our old apartment to our new home. Most of our stuff was bought new while a few pieces came from Craigslist. Right now, we have furnished the living room, the family room, dining area, master bedroom and one of the guest rooms. The other guest rooms and the game room are still empty. When we buy furniture, we try to find a balance between something frugal and something of high quality and sturdy – so hopefully the rooms that are already furnished will not cost us much more (except for a few knick-knacks every now and then) for quite some time to come. (Updated, based on comments from Debbie) Fortunately, we did not have to spend on painting our home since the previous owners did it for us. And so far, we have not done any other re-modeling projects either. Maybe a few years down the line, we will upgrade our kitchen counter tops. If you are moving into a resale home, you need to take these expenditure into account too. Two of my friend who bought homes around the same time as we did had to repaint the walls of the spare rooms since the previous owners had painted them to match their kids taste, which was not what my friends liked :)

Appliances (Updated. Thanks, Debbie for pointing this out.)
Cost while renting: $0
Cost while owning a home: ~$2,000
Explanation: While we were in an apartment, the refrigerator, the washer and the dryer were included with the unit. But when we moved to our own house, we had to buy these appliances ourselves. Until we are in the market for these appliances, we had no clue how complicated buying on of these could be. For instance, you can get washers and dryers ranging anywhere from $200 to several thousands!!! By managing to buy our appliances during a sale, getting some discount for bundled buy and availing the price match options, we managed to get all three appliances for ~ $1,800. In addition, we moved our old TV to the bedroom and got a new TV for the family room. It cost us around $200. A large flat screen TV purchase is still pending, but we have put it off for now.

Pest Control
Cost while renting: $0
Cost while owning a home: $330 per annum.
Explanation: While we were in a apartment, we didn’t have to worry about this since the apartment managers took care of it. When we moved in to our house and noticed a few ants, we decided to pick something up from the Home Depot and take care of pest control ourselves. But the better half is allergic to ant bites and our initial attempts to get rid of the ants was only partially successful, so I eventually called the pest control and signed up an annual contract.

Lawn & Garden care
Cost while renting: $0
Cost while owning a home: ~$800 in 2 years.
Explanation: Again, at the apartment, this was taken care of. But at home, we have to take care of it ourselves. The first summer, we just hired someone to do it for us and it cost us $30 a pop. We did not sign up a contract and called the person only when the lawn was quite over grown. During the second summer though, we went ahead and purchased a bunch of equipment and it cost us a little over $400. Add to that the other knickknacks that we had to buy for gardening and we must have spent a grand total of around ~$800 so far. This summer though, it shouldn’t cost us anything more than routine maintenance since we have already bought the equipment and the better half will take care of the lawn himself and so we don’t need to hire anyone.

Other maintenance
Cost while renting: $0
Cost while owning a home: $0 (so far)
Explanation: Our house is about 5 years old, and so far we have not had to do any other maintenance (knock on wood). But the last time the pest control guy was here, he pointed to a tree that was growing very close to our roof and said it was not only a path for pests to get in, but can also damage the tiles. We asked around a bit for estimates for trimming the tree, but the quotes were so ridiculously high, that we haven’t done anything about it yet. Also, since it’s been two years that we moved in, we are planning to have the carpets steam cleaned, the a/c ducts cleaned etc. So this summer we are going to have to spend a bit on maintenance – hopefully that will avoid some of bigger bills in the future.

While renting: 0
While owning a home: ~$60K
Explanation: Since we put a down payment of 20% and are paying off our mortgage quite aggressively, we have built a fair amount of equity in the house.

While renting: 0
While owning a home: ~$35K
Explanation: Ok, that is a totally hokey number. I mean, when you really sell the house, you don’t know if someone will buy it for that price and also, you have to pay about 6% of the sale price in realtor fees. But just for the thrill of it, I would like to think our house has appreciated quite well. How did I come up with that number? Like every body else – mostly by picking up the flyers when some of the houses in the neighborhood go on sale, by browsing on zillow and the county appraisal for tax purposes.

My intention in writing this article is neither to encourage you to own a house, nor to discourage you from it. I just want to provide you with a general idea of the differences in the costs, so you can make an informed decision. All of you out there who own a house, please feel free to chime in with anything I left out or point out to any differences depending on your location.

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Brett McKay said...

Hmmm... looks like owning a home is expensive. My wife and I have talked about moving into a condo when we're done with school. Not only do you save some money, you save time not having to worry about planting a garden and mowing the lawn.

We'll probably end up buying a house, though. The idea of having a little backyard where the kiddos can run around is very appealing.

ispf said...

Brett: Yeah, the backyard was a big draw for us too. That and a lot of other intangibles that make the additional cost worth it - like being able to paint the walls whatever color we want (not that we would, but still!), never having to worry about space crunch, having separate guest rooms for our guests when we have more than one couple visiting us, parties at neighbors not keeping us awake, having a garage for our cars so they are not out in the elements, trees in the front and backyard, and just the sheer joy of ownership :)

golbguru said...

Ispf, that's very interesting. Were any of those *not anticipated* before buying the house? I mean were there moments like "wow...we did not see that coming"?

If I may request...would you please add a section to the effect "Total expenses - rent and own"? Sort of summarizing your total per month costs - just for a better feel. :)

I am far far away from buying a house yet...but I can already see the attraction of a backyard. In a couple of weeks, we are heading over to our friends' house to mess with their backyard by planting some veggies. ;)

ispf said...

Golb: We spoke to some of our friends before buying the house and were actually expecting a lot of these additional expenses. But, boy, there is a huge difference between knowing about additional expenditure and actually having to spend it :)

I dont have an exact estimate of the difference in total expenses since some of the expenses are one-time only, and others are annual etc. But if I were to make a rough estimation, I would say we spend about $1000 more per month now compared to before (that includes all the listed items above). But there are some tax breaks at the end of the year which offsets it a little. It got a bit complicated when I started to look at the difference in taxes, so I left that part out.

After you are done planting veggies at your friends house, wanna stop over at mine? Both the better half and I have distincly non-green thumbs. Anything we touch seems to start wilting the moment we step away :)

Christopher Smith said...

Good review. Buying a home is a key to your long-term financial stability, but now isn't always the right time to buy. A lot of new homeowners don't realize what they're getting into and end up in hot water.

The big reason to own a home is for appreciation purposes. But I'd also argue that leaving out your tax savings considerably undervalues your investment.

Based on the fact that you pay $986 principal + interest per month at 5.125 percent it seems that your mortgage had an intial balance of around $181 thousand. If that's the case then you paid around $9,220 in interest over the first year of the loan. If you're in the 25% tax bracket then that's a savings of around $2,305. That's not chump change - that's enough to offset a lot of those other charges.

A second issue: being in a hurry to pay off that 5.125 thirty year mortgage isn't always the best use of your dollars. Paying off high interest credit cards: good. Paying off your low interest home mortgage which gives you a tax writeoff: maybe you could do better.

ispf said...

Cristopher: That's a pretty accurate analysis you did... impressive!

About paying off mortgage early, I wrote about it here. We do understand that we could do better, but we want to get out of the mortgage as soon as we can. I think the peace of mind and freedom it brings is well worth it (at least for us).

Debbie said...

One more thing--people are much more likely to spending money on decorating a place they own than a place they rent. Besides the extra furniture you mentioned, there's also repainting, switching out the flooring, getting fancier countertops, etc.

And you didn't mention all the applicances. Most people have to buy their own refrigerator, washer, dryer, etc.

ispf said...

Debbie: Thanks! I don't know how I could forget the appliances since we spent a *lot* of time in researching and picking them!!! Thankfully though, we did not have to do anything in terms of painting and remodeling! I have updated the post to include these. Thanks, again.

Brian Park said...

Like few others pointed out here, in general owning a home is more expensive but it builds up your equity and if your home get appreciated in value, that's where your gain will be.

Gates VP said...

Hey, just found this via the Carnival! (Campaign against myths part 4)

The fiancé and I have had several conversations about this home owner thing. We're both agreed on the rental life right, but I actually have several number-crunching spreadsheets about all of this and many conversations with aunts and uncles :)

Suffice to say though, on the "stuff you may have forgotten" is actually "long-term maintenance". And it may sound kind of odd, but if you're new home owners you probably haven't hit this point yet. There's going to a be time, and it's usually all at once, when "everything" seems to need replacement: the water heater will go, the paint will peel, the shingles will fall off, the fluorescent light holders will die, the AC unit will go, the fan in the bathroom just stop, etc.

You mention preventative maintenance elsewhere, but I'm actually talking about maintaining. Things like shingles and rugs and linoleum and water heaters and AC and appliances simply don't last forever. In fact, to remain competitive, many companies are selling stuff that simply won't last as long b/c it's cheaper to manufacture. This of course includes the guys making water heaters and AC and appliances.

So appliances that you "cannot live without" are likely only as good as the warranty they come with. What's the warranty on your $1800 of appliances? If they're only guaranteed for 5 years, then they're costing you 300+ / year.

Things like paint simply need to be redone every 5-10 years, shingles also seem to last in this range (depending on your climate) Rugs only last for so long and if you have kids the "rec" room carpet will quickly become the "wreck room" carpet. If the house needs 4 thousand dollars of paint (& labour) every decade that's another 400/year (plus all that other stuff)

This stuff is overhead just like taxes and utilities.

Another "forgotten" is transportation accessibility. I'm living in a major Canadian city and out here bus lines and shopping centres tend to cluster very close to rental units and apartments. Easy bus access and a grocery store (and everything else) across the street means that I don't "need" a car. Many homes in suburbia simply can't be run without a personal vehicle. Many have reasonable commuter access, but cannot leave the house after 6 without waiting an hour for the bus. The situation is aggravated if you don't have any public transportation access (live outside the city).

If you own a non-bus friendly home, you're pretty much stuck with car ownership as well. It's easy to write this off until the car breaks down and you can't get to work for an important meeting (or some similar crisis). It's really bad if a financial crisis strikes and you can't make the car payments (or the insurance). B/c it's not like you can just move, right?

And bad access means that you'll be driving your teen to and from the mall for their work shift.

I don't know if it's easy to measure the annual cost of this, but let's say that it's an attached cost on some homes or even a "lifestyle lock-in". The same goes for moving, moving for rentals is far cheaper than moving houses, b/c you have lots of overhead going around. So commitment to the "owning" lifestyle usually means that you're accepting extra overhead on your next move.

And what's this with not painting a rental? Why not? You can totally paint a rental you just have to paint it back before you leave. If you're renting instead of owning, you're planning to be there for a while, so painting once now and once again when you move out in 10 years is no different from painting your "own" home.

ispf said...

Gates: Wow, that's got to be the longest comment I have ever received. Thanks for taking the time!

You make some very good points. We are relatively new home owners and at the time I wrote that article, we really did not have any repair costs. However, we recently had hail in our area, and a lot of houses in our neighborhood are getting their roofs fixed. While we have not had any visible damage, the inspector for the company doing our neighbors roof looked at our roof and said we need to get it replaced :( Our insurance will cover most of cost but we still need to pay a deductible. And at 1% the house value, the deductible is quite steep. So you are right, the maintenance cost of home ownership is quite steep.

As for transportation, in my town public transportation is almost non-existent. So irrespective of whether we rent or own, we need a personal vehicle.

And for painting, the apartment lease clearly states that we are not allowed to "modify" the look of the dwelling in any way. I suppose we could do what you suggested - paint it now to what we like, but re-paint it before we leave. But for me it hardly seems worth the effort since the longest we have stayed in the same apartment is around two years. Every time the lease expires, the apartment people jack up the rent. Basically how it works is, when we sign a lease, the management offers a bunch of incentives which when pro-rated will reduce the rent quite a bit. But when the lease is up and we try to renew it, they cannot offer us the same specials and the rent goes up. So every 1 or 2 years, we have moved. If we could stay in the same place for 10 years though, I do see your point.

Overall, what you say is right. Home ownership has its costs and before jumping into it, one *should* be well aware of what he/she is getting into!