Renting vs. Buying a Home: Can HOA Fees Be Worth the Money?

NerdWallet's Smart Money Podcast

The episode explores the financial and emotional complexities of choosing between renting and buying a home, specifically focusing on how HOA fees

Key takeaways

• Ryan Sterling notes that homeownership is a 'negative cost of carry' due to maintenance and taxes.
• A 6.8% interest rate can result in a 24-year break-even period for buying vs renting, whereas 5.8% drops it to 11 years.

Main topics

• Renting vs. Buying
• HOA and Condo Fees

Notable quotes

Renting is the maximum amount you're going to pay in a month... When you own a home, the mortgage and property taxes is the minimum you're going to pay.

Conclusion

The episode highlights that neither renting nor buying is universally

Transcript preview

Speaker 3 (0:00) Today's episode is brought to you by Vinted. Sean, Speaker 1 (0:02) do you have clothes in your trunk that you've worn but have no idea what to do with? Speaker 3 (0:07) You know what? I do not because my car is super clean right now. But I'm betting that you do, Elizabeth. I Speaker 1 (0:13) sure do, Sean, unfortunately. And I've been wondering what to do with these clothes. And then I found out about Vinted. So they're like this secondhand marketplace app. And their mission is to make secondhand your first choice. Speaker 3 (0:26) Yeah, Vinted helps their members find great deals and easily sell the clothes they no longer wear. And that helps give quality items a second life again and again. Speaker 1 (0:35) And it helps the planet too. And we care about the planet, don't we, Sean? We Speaker 3 (0:38) do. Well, Elizabeth, whether you're clearing out a bag of clothes in your trunk that's been sitting there for months and months, or you just have pieces in your closet you don't want anymore, Vinted makes it super simple to refresh your wardrobe, earn extra cash, and give your clothes a second life. Plus, there are no seller fees, so you keep what you earn from every sale. And Speaker 1 (0:56) also, the app is free to download. I think that's a great perk. Speaker 3 (1:00) Vinted makes listing items quick and simple. And once an item sells, Vinted creates a prepaid shipping label for you, which takes out a lot of the burden of sending your items. See Speaker 1 (1:08) what's hiding in your closet or like me, your trunk. And you might be surprised how much you can earn with Vinted. Download the Vinted app for free to start listing with absolutely no seller fees. Speaker 3 (1:19) Hey, smart money listener, you could win a $250 Amazon gift card and help improve our show. Speaker 1 (1:24) We're inviting you to take our annual listener survey. It's shorter than last year's and could bag you a sweet grand prize. We're giving away not one, but two $250 Amazon gift cards. To Speaker 3 (1:35) participate, just visit nerdwallet.com slash podsurvey or check out the link in the show notes and submit the form by September 30th for a chance to win. Official rules are at nerdwallet.com slash podsurvey. Good luck. Owning a home is still a core tenant of the American dream, but could renting be a better path to prosperity? Speaker 3 (1:55) Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And Speaker 1 (2:01) I'm sorry to break it to you, Sean, but I'm the favorite co-host, Elizabeth Ayala. What? Says Speaker 3 (2:06) who? Speaker 1 (2:07) Says the audience. Vote, guys. I'm just kidding. Speaker 3 (2:10) Okay, now we're in a competition here. Let's see who's the favorite. Speaker 1 (2:13) All right, here's this episode's question. Hi, nerds. I was wondering if you could touch on home ownership versus renting when the home purchase in question comes with a condo fee. None of the rent versus buy advice I've seen helps me understand how we should be thinking about condo fees in a place like New York City. This time around, we are joined by Ryan Sterling, Wealth Advisor with NerdWallet Wealth Partners and affiliate of NerdWallet, Inc. Welcome back, Ryan. Thanks Speaker 3 (2:40) so much. Happy to be here. I know you've talked a lot about the rent versus buy debate. So let's start by laying that out. On one side, some will say that renting is just throwing money away while owning a home is a definite path to building wealth. And then on the other side, folks might say that renting gives you a lot of flexibility and who wants to deal with a money pit that is homeownership anyway. So in your work, Ryan, how do you think about this debate? Speaker 2 (3:05) Yes to everything you just said. Great. Debate settled. really depends. I would say that my baseline here is that I am pro-homeownership, period, end of statements. However, homeownership is not necessarily the best way to prosperity, number one. Number two, it's not right for everyone. Number three is it very well might not be in your best interest right now, depending on where you are in your life. So it is a huge It depends. But my baseline is, again, I think homeownership is a net net positive for a lot of reasons. I think, again, though, it's not necessarily for everybody, especially at a certain point in time. Speaker 1 (3:48) Ryan, how often do you find yourself telling your clients that homeownership maybe isn't the best path for them? Speaker 2 (3:55) All the time. And I will say that the nails on a chalkboard for me is that phrase that Sean just used. And that is the you're throwing away money with rent. Yes. But you throw away a lot of money owning a home too. You have your property taxes. You have your maintenance. If the HVAC system goes out, like you're not getting that money back. You know, roofs need to be repaired. Owning a home is what I call a negative cost of carry. It is an asset, but it costs you money to own it. So another way to think about this too is that renting is the maximum amount you're going to pay in a month. You know exactly how much it's going to be. When you own a home, the mortgage and property taxes, that's the minimum you're Speaker 3 (4:44) going Speaker 2 (4:44) to pay a month. And at some months, you might not have to pay anything for maintenance. Some months, it could be tens of thousands of dollars. You don't know. So again, you have to think about rent's the maximum. The mortgage and property taxes is the minimum. However, I'll add, your mortgage is not likely to go Speaker 3 (4:59) up year after year unless you have something like an adjustable rate mortgage. So I really like the idea of having a consistent monthly payment for your mortgage, barring any changes in property taxes that might happen, for maybe 30 years. That's really appealing. Yeah, but maintenance costs usually go up with inflation. That's very true. And you aren't a homeowner, right? So I actually am Speaker 2 (5:19) now a homeowner. I wasn't for the longest time. Yeah, I actually just bought a house. So I feel like, yes, exactly. I can talk about this from firsthand experience. And I will say that. All of the advice that I've given clients over the years, I'm happy that I've given that advice because I am living it right now firsthand. And I can tell you that, you know, it's interesting. I run my own financial plan. And Sean, what you said is it's Speaker 3 (5:42) a Speaker 2 (5:42) really good point in that plans tend to work better when home ownership is involved. And that is because of exactly just what you said, in that if you have a fixed rate mortgage 15, 30 years, at some point in those plan, those cash flows fall off. where if it's assumed in the plan that you're renting forever, you know, we know that rent's going to go up at some sort of inflation rates. So it is one of those things where it does start to cap your costs at a certain point in time, even though certain other expenses of owning a home do go up with inflation. It's not even remotely close, though. Like owning a home and having it paid off, like that is definitely a net positive as it relates to primarily kind of cash burn in retirement. So it definitely is a net positive. I would say for my own financial plan, it's been a net positive. when I look at probability of success. However, it has been very expensive. It has come with a number of surprises. I knew there would be surprises and the surprises are presented themselves, but they still feel like surprises, even though I knew surprises were going to come. Right. You never know exactly what shape the surprise is going to take. Exactly. But it's going to show up. And I will say that in the short term, at least, it hasn't been fun. Like there's something that's been nice about it, but it does now come with more headaches and more expenses compared to renting. So I don't regret doing it. I am also very glad that I came in with a very sobering view of it because it has been expensive. And you live in New York. Speaker 3 (7:07) And so it often makes sense to keep renting forever because buying is just so costly and unaffordable for many. Had you always wanted to buy eventually or did you come around to the idea over time? So we actually, we bought a house Speaker 2 (7:20) outside of New York. And I was one of those people where I was. fully prepared to rent indefinitely in New York and totally fine with that. And by the way, we have a number of clients who are in their 50s and 60s who are at financial independence. They've accumulated net worth so well into the millions and they've never owned a property. So like I've seen a number of case studies where like it does work that you can reach financial independence and get to a very, very comfortable place without ever owning a property. And like for me, it's interesting, like the apartment that I lived in in New York, a couple of years ago, we were given the option to buy the apartment. And at first we were kind of like, hey, we really like it. We see ourselves staying for a while and it would be nice to own something. But when we started kind of digging into the cost, again, the whole idea of like you throw away money with rent. Well, when I looked at the property taxes and the association dues, they were actually just as much as we were paying in rent. So I looked at this and I was like, wait a second. Like if I pay for it in cash, which I can't pay for it in cash, I'm going to take on a mortgage. My monthly payment was going to double. from buying compared to renting. So we looked at this and we were like, you know what? Like, it just kind of makes sense to rent it. And I'm glad that we made that decision. Now, there's some life circumstances that have taken us out of the city, all for good reasons. And when we looked at kind of being outside the city, that's when the math started to math out a little bit more, where it's like, okay, like, should we rent a house? Should we buy a house? And when we looked at it, it's kind of a net-net on a monthly basis to be pretty even. That said, running the full financial plan, like owning the house just made more sense and then quite frankly I just kind of wanted to be a homeowner. So Speaker 3 (8:58) like that played into it as well. There's something intangible about that. Yeah, it's really gratifying in some ways. I am glad that you mentioned the like monthly HOA fee or what's kind of the equivalent in buildings in New York, because that's really core to our listeners question. And it can be quite a deal breaker for a lot of people. I was looking into buying a condo at one point and it just made no sense to me to fork over so much money each month to an association that's going to be telling me what to do with my property. And I just, it's a whole tangled. web of complication and expense that I didn't want to get stuck in. But I do want to talk about how the financials come into play here. NerdWallet has this really handy rent versus buy calculator. We'll link to that in the show notes. And it shows you when you might come out ahead buying instead of renting. So I played with this a little bit in preparation for our conversation. And I was surprised by how long it can take for buying to be the better investment. So let me lay out some numbers here. Just for an example, let's say rent is $2,000 a month with a one month security deposit. And then let's say the alternative option is to buy a house that's $420,000.