Renting Vs. Buying A Home?

Mordechai and Aliza Friedwitzer lived in a beautiful three-bedroom apartment rental and the worst part of Mordechai’s month was writing out the rent check. With only one child, there was plenty of space, but the $1,000 monthly charge seemed like a lot of money to be handing over to a landlord. Many of Mordechai’s kollel friends were instead buying homes in Jackson where prices were much lower than Lakewood’s. His chavrusa, Yitzy, went over the math with him on the purchase of 4-bedroom bilevel for $360,000 (with 20% down at 4% interest). Although monthly payments doubled after buying (from $1,000 rent to $1,951 mortgage including taxes and insurance), and they would need a co-signer to qualify, the loan balance fell by hundreds of dollars with each mortgage payment. “When you own you pay yourself. When you rent you’re paying off your landlord’s mortgage,” insisted, Yitzy! “Since you’re going to have to buy someday, you might as well do it now when your expenses aren’t as high” he continued. Yitzy’s logic seemed compelling, and the Friedwitzers began house hunting. Is renting a home throwing out money? Should all savvy young couples be buying houses?

Owning a Home Has Downsides

Buying a home can be an excellent investment, but it’s not as simple as many young couples think. The stress of doubling their most considerable monthly expense can end up pushing the Friedwitzers over the edge. Building long-term equity in a home is nice but isn’t their primary goal at this point to make sure Mordechai can learn undisturbed? Even if they can eke out the payments, a house can be a big distraction to a yungeman’s learning. Property, especially one that’s decades old, requires ongoing maintenance and many a homeowner thinks back wistfully to the days when the boiler breaking down was the landlord’s headache and expense. Yes, Mordechai’s landlord is making a profit, but he is working for it!

Another thing to consider is that buying a house equals putting deep roots into a community. At this early stage of their life, are the Friedwitzers sure where they want to settle? Maybe they will want to move closer to family as they have additional children? What if Mordechai gets offered a fantastic shteller in a different city? Sure, they can sell, but they will probably lose money if they don’t stay put for at least a few years. Home buyers usually begin with a loss due to legal and title fees, mortgage points, moving costs and the need to pay for a sales broker to move. By making this substantial investment, a family that buys loses a lot of flexibility to move quickly to take advantage of new opportunities. This concern can make a rental a better choice for people who are not yet completely settled.

Buying Too Much of A Cheaper Thing

Even if Rabbi Friedwitzer is committed to Lakewood and willing to manage the burdens of owning, his calculation for justifying buying a house is flawed. Because real estate has more moving parts, it’s easier to illustrate the underlying mistake with the example of the Kezers, a cheesecake loving couple. Every week they bought a luxury cheesecake for Shabbos from the bakery. One day, Mr. Kezer pointed out that if they bought the right equipment and made this delicacy themselves, they would save a lot of money. They purchased the ovens and mixers and began crafting their delightful homemade cheesecakes. Because there was no outsider making profits from them they figured they were saving some 30% on each one. However, since they were now owners and the cakes so cheap, the Kezers began making and eating two cheesecakes weekly! Although they were appreciative of the abundance, they were also spending 40% more on cheesecakes weekly instead of less (70% of bakery price x 2 cakes).

Getting back to houses, although over the long term ownership is usually significantly cheaper than renting, this rule only applies when comparing apples to apples. Saving say 30% in the cost of housing (by removing the landlord’s profit) won’t cover the doubling or tripling of the living space being ”consumed.” In this case, the tradeoff is between renting a small shared space (the apartment) to buying a much larger private one (a decent sized single family house). Just like a cake, even if you own your living quarters, there are costs involved including interest, taxes, insurance, maintenance, utilities, and even cleaning, which are much higher in a bi-level than a basement rental! By eating much more “cake” than they need, the Friedwitzers will end up spending a lot more on their housing despite not having a landlord making a profit off them.

A Smarter Way to Buy

Assuming again, that the Friedwitzers are comfortable with the burdens and risks of owning a home, there are a few ways that they can “have their cake and eat it too.” While moving into a much bigger home is waste of money, instead of a bi-level they can buy a house with a basement rental and rent out the upstairs. This way, they can live in the properly sized space in the basement until their family grows. At that time they can move upstairs (renting out the basement) and finally, years later, perhaps when their mortgage is almost paid off, they can use the entire home. A similar system is to buy a small ranch with an unfinished basement. As the family (and income) grows they can build out the basement and later, if necessary, add an extra level above. By combining ownership with the sequenced growth of space consumption, buying can be a shrewd financial strategy for a young family. Otherwise, they are just getting fat on cake.