Summary

• Renting your primary residence doesn’t give you much upside or downside, and ownership exposes you to both upside and downside fluctuations.
• As a homeowner, you’re definitely going to have to be more hands-on in all aspects – financials, taxes, insurance, selling/renting, managing property.
• Renting is not as bad as professionals in the residential real estate market make it sound to be, don’t be fooled by their interests and make sure to have a balanced view of how real estate fits into your financial perspective.

Introduction

I drank the Kool-Aid on stocks at an early age (note to come back to this for my lessons on stocks) and was never a big believer in real estate until I met my wife, learned more about the tax advantages of real estate, realized how both sides of my families had built wealth through real estate, and eventually went through an actual real estate transaction.

That is not to say that I am making a lot of money on real estate currently (if I sold my property today, I’d actually lose money because of all the transaction costs), but it does mean that I’ve accumulated a lot of valuable lessons firsthand that I want to share with other people.

Now that I have a fuller picture of renting, owning your primary residence, and owning a rental property, I thought it would be worth sharing my lessons with others.

Renting vs. Owning

While many people want to own their primary residence eventually because they view that renting is simply giving money away to someone else when you could be paying off your mortgage, I have found that this is an overly simplistic way of looking at being a renter. Below are some pros and cons of renting.

Consideration	Renting	Owning
Maintenance	You’re not responsible for wear and tear damage, and your landlord/property manager should take care of things not working or breaking (as long as you’re not at fault from misusing it or your lease specifically states that you’re responsible for it).	You should be prepared to fix anything that breaks either yourself or by hiring a handyman/woman. Also, regular maintenance like flushing out the water heater, gutter cleaning, yard maintenance, just to name a few will be your responsibility.
Taxes	There are no property taxes that you pay as a renter. But renters also don’t get the tax advantages of being a homeowner or landlord.	Homeowners are responsible for paying property taxes (included in your mortgage payment if you have a mortgage) that typically increases over time. Yes, taxes will go up if the value of your property increases but that’s not the only way. The property tax levy rate can increase and lead to your property taxes increasing despite values not going up (actually happened to us in WA).
Insurance	Renters’ insurance is much cheaper (I haven’t paid more than $200/year) than what you would pay as a homeowner.	Average homeowners’ insurance expense was ~$1,800/year according to Policygenius. My experience is that homeowner’s insurance has been rising rapidly in the last 2+ years. Also, homeowners in some states like CA are experiencing difficulties (Insuring a Home in California Is Getting Harder – The Journal. – WSJ Podcasts) getting new policies or getting renewals. Anecdotally, I have heard that other states like WA may be next in-line.
Other fees	Unless specifically stated in your lease, you’re usually not responsible for any fees associated with the property.	Expect to see increasing HOA fees, potential special assessments from your HOA, and if applicable sewage capacity fees (in parts of WA for newer builds),
Flexibility	We have learned that you simply don’t know what life will throw at you and how your perspectives will change. We used to love the neighborhood that we lived in, but our perspectives completely changed with the birth of our daughter. With every lease end date, you as a renter have the flexibility and option to renew, find another rental, or buy a property to move into .While it’s true that your landlord could increase your rent significantly and this could put a strain on your family’s budget, I believe that if market rents are going up, it’s very likely that your expenses as a homeowner (taxes, insurance, HOA, etc) are going up as well. At least with a rental, you have additional flexibility of finding a smaller place, comparable rental with lower rents, or negotiating with your landlord. It’s much easier to break your lease than it is to sell your place or to find a tenant and manage it.	As a homeowner, you’re not entirely shielded from rising rents because homeowners’ expenses typically rise with home values and rents. Some could argue that you could put your home up for rent or sell the place. You will most likely incur significant expenses as part of this process. I would conservatively budget 10% for selling your house. If you’re renting your place out, $2-3k for annual maintenance (this is more like a median and can vary depending on the size, age, and location of your house), 1-month rent for listing fees, $1k+ for miscellaneous initial set up expenses, and depending on your market some overhead costs during vacancies.

Other lessons

Owning rental vs. primary

Professionals working in the residential real estate market (home insurance, mortgage, escrow, title, residential real estate agents/brokers) love to tout the tax advantages of owning your home, but it’s actually not that large of a benefit in my opinion compared to operating a rental property, which has significant tax benefits as it’s considered a proper business.

For a rental property, you can deduct additional expenses including but not limited to depreciation, insurance premium, services and material costs related to repairs, and transportation expenses.

For a primary residence that you own, your deductions are really limited to state and local taxes and interest on your mortgage up to a certain amount (IRS guidance). For your real estate tax, the deduction is limited to $10,000; for your interest on your mortgage, the deduction is limited to interest on a mortgage under $750,000 ($375,000 if filing separately). Keep in mind that the standard deduction in 2023 is $27,700 ($13,850 if filing separately), so all your itemized deductions including property taxes and mortgage interest need to be above this threshold for you to get the tax advantage of owning your primary residence.

Rent vs. mortgage payment

Currently, most of the markets in the U.S. are better to rent than to buy (link to Forbes article. This isn’t always the case and there can be difference in markets (for example, Detroit, Cleveland, Houston, and Philadelphia).

This is not to say that buying in markets where rent is higher than a typical mortgage payment guarantees that you’re better off. Typically, markets like Detroit, Cleveland (report by RealWealth, Houston (report by RealWealth) and Philadelphia have not appreciated in value as much. Essentially, there’s a reason why it’s cheaper to buy than rent because your equity won’t grow as much in other markets.

Because of high interest rates/mortgage rates right now, many things need to go right for your house purchase to beat just renting and investing that money somewhere else (investing in a high yield savings account, purchasing rental real estate, investing in stocks, or anything else).

Home inspections

I wish I had been aware of the conflicts of interest in getting pre-inspected properties and using the home inspector that your real estate agent gets for you.

While I think both the pre-inspection from the seller that we bought from didn’t have any noticeable flaws, and another home inspector that our agent was ok, I don’t think I should have relied on either one of them or have reasons to believe that they weren’t that thorough.

I’m not questioning the integrity of either of these parties but I don’t think most sellers or buyer’s agents have the incentive to hire the most thorough home inspector, because he/she are more likely to find issues that may derail the closing of a transaction and agents/sellers won’t use them again in the future – essentially this is a misalignment of incentives and a selection bias (don’t get me wrong, these are not unique to the real estate industry in my opinion and rampant in many industries).

My recommendation is to hire someone very detailed oriented that’s working for you and to spend extra money on it, this is certainly what I’m planning on doing for my next purchase.

Agents

Real estate markets are very local and state-specific, so some of the details may not be relevant to homebuyers outside of WA.

We used a high-performing agent in the market for our transactions but there are a few things that we wished we had known before working with the person.

Offers – our agent put together offers that were very competitive and aggressive but also made it riskier for us in the case that things didn’t turn out the way we expected: our earnest money was very high compared to other offers that we have seen in the market, and our agent didn’t really take the time to explain details of our offer, in hindsight. We didn’t run into trouble with our mortgage or any other part of the transactions, but we could have been on the hook for a significant amount of money if something had gone wrong.

Lenders – our agent had existing relationships with lenders that we leveraged. One of the mortgage brokers got us a pre-approval letter and called the selling agent to let the sellers know that our financials were solid. The mortgage broker gave me a range for our rate and quoted us another rate that was substantially different than what he gave us previously. I also got rates from my primary bank that was lower, but our real estate agent passive-aggressively guilt tripped us and the mortgage broker came up with a story that the mortgage agent from my primary bank might be baiting me with a lower marketed rate and that I might end up with a higher one if I actually went through the process (ironically, I don’t know if he was aware that this was what he was doing with me). At the end of the day, mortgage brokers/agents, real estate agents, and other people part of the real estate food chain are making money off of consumers transacting and are salesmen/women. Don’t be fooled by their friendliness and believe their stories, this is a business transaction. You don’t owe anyone anything, unless you work in the industry. Go with the lender that offers the best rate.

Alignment of interest – we had friends refer us to an agent, and the agent did a great job of presenting a persona that he’s working in our best interest. Unfortunately, real estate agents make money off of their clients’ transactions, so they’re incentivized to get you to buy or sell. Despite what they tell you, just be aware that agents are salespeople and don’t have the skin in the game. Essentially, use your real estate agent wisely, trust but verify any information they give you.

Landlord-tenant laws

My wife and I wish we knew that WA state was such a tenant friendly state. In converting our primary residence to a potential rental, we discovered the rapidly changing laws, increasingly tenant friendly (to the extent that it became restrictive to mom-and-pop landlords), and how much we would have rather lived in WA as tenants rather than homeowners/landlords.

It’s worth doing some research on how your market’s landlord-tenant laws look like to see how attractive the possibility of becoming a landlord looks like for your family.

What I’m doing now

Renting my primary residence

With our move down to SoCal, we decided to rent for the foreseeable future. Unfortunately, the market is chilly up in WA while it’s pretty competitive down here but we’re trying to keep it cash-flow neutral at the worst, so that we don’t have more money going out from our lease in SoCal compared to money coming in from our rental in WA.

Based on our learnings about property management so far, we’re documenting the move-in conditions, communications with our landlord as much as possible.

Also, we’re looking up the local landlord-tenant laws to better understand our rights as renters so that we can rightly ask for what’s landlord’s responsibility and make sure we’re being compliant renters.

Looking for rental properties

Despite the valuable mistakes that we made so far in our real estate investing, we’re still looking for rental properties – cash-flowing properties in landlord friendly markets out-of-state or in-state.

We’re interested in more landlord friendly markets like TX, AZ, OH, FL, or NV since we’ve heard that they cash flow better as well.

We’ve also heard that certain cities in Orange County, CA are more landlord friendly. A property in OC could offer the opportunity to self-manage (more on this below) but the offsetting factor is that properties in OC don’t cash flow as well because of the high value.

In light of these interest, we’re studying markets in-state and out-of-state, with us making trips to AZ, TX, OH, FL, and NV for business or leisure.

Working towards achieving real estate professional status (REP)

Overly simplified explanation of the tax advantages of real estate is the following: active real estate professionals > passive real estate activities > primary residence homeowner.

Right now, my wife and I are passively operating real estate and would ultimately like to build a portfolio of properties and maintain enough working hours so that one of us can qualify as a real estate professional.

Resources

Publication 530 (2023), Tax Information for Homeowners | Internal Revenue Service (irs.gov)

Property Tax Deduction: Rules & How to Save – NerdWallet

Standard Deduction 2023-2024: Amounts, When to Take – NerdWallet

Renting May Be Better Deal For Home Buyers Till Rates Come Down – Forbes Advisor

Housing: It’s cheaper to buy than rent in only 4 major US cities, study shows (yahoo.com)