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Should You Buy or Rent, Which is Better?

should I buy or rent house

Have you ever asked yourself the question “is it better to buy or rent” when it comes to finding a place to live?should I buy or rent house If you read my last post “Is Buying a Home a Good Investment?” , you found that a home is not always a good investment if you’re looking for in investment-like return on your money.

In some cases you can make a decent return over 30 years, but in many other cases, the appreciation of the home just doesn’t keep up with all of the expenses such as mortgage interest, maintenance, property taxes, and insurance, actually resulting in a negative return on your housing investment.

But we’ve always been told that buying a house is a good investment, and that renting is just throwing money away.  So when it comes to the question of “should I buy or rent?”,  what should you do?

 

Buy or Rent, What Should You Do?

The best way to find out whether buying or renting is better is to compare the numbers.  First, we’ll look at the numbers from my last post and find that if you bought a $200,000 house with a 30 year mortgage at a historically average 6% rate, and spent $125/month on maintenance, $125/month in property taxes, and $45/month for insurance, at the end of 30 years you have spent $519,876.

However, at a rate of appreciation of 3% over 30 years, your house would only be worth $491,368.  That means that over a 30 year period, you lost $28,508, or about $950 per year on your investment.

That doesn’t sound so hot.

 

So What About Renting Instead of Buying?

Now let’s take a look at the numbers when it comes to renting.  First, there’s good news here.  When you rent you don’t have maintenance costs, you don’t pay property taxes, you don’t pay interest on a mortgage, and renter’s insurance is a pittance compared to homeowner’s.  Sounds pretty good so far!

In order to run the numbers on renting we will first have to make some assumptions.

Let’s assume that today you pay $500/month rent, which is a low estimate for many areas.  Of course, over time, rent increases, so we’ll assume that at the end of 30 years you will be paying $1,500/month in rent.  Over that 30 years the result is that you have paid an average of $1,000/month in rent during that time.

So over a 30 year time period (360 months) you’ve spent a total of $360,000 in rent ($1,000 x 360 months).  Add in renters insurance at $15/month for 360 months and you get $5,400.

That comes to $365,400 spent on rent and insurance over 30 years.  Not too shabby!  That’s $154,476 LESS than you would have spent on owning a house.

Looks like you saved a lot of money!

That means on a monthly basis you would have spent $429/month less than if you had bought a house.

That’s something to think about.

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Buy vs. Rent During Retirement

But now let’s look at what you have at the end of 30 years.  If you’re a renter, yes, you spent over $154,000 less over the years, but you have absolutely nothing to show for it.  You also still have a rent payment to meet every month and the rent will certainly not be going down.

If you continue renting into your old age, in 25 years you will spend another $450,000 on rent ($1,500 x 300 months) at a time in your life when income is usually very limited, and that number assumes the rent never goes up over that 25 years, so that number is actually very low.

However, when you own a home instead of rent, at the end of 30 years you have no more house payment to pay and you have a physical asset worth $491,368 that will still continue to appreciate over time.  You will still have expenses to pay such as property taxes, maintenance, and insurance, but they are much less than rent and will actually be offset by the appreciation of the value of the house.

 

Equity is the Key

I won’t bombard you with anymore numbers, but I think it’s obvious that owning a home instead of renting is better in the long run because you’re building equity as long as you own the home, and you set yourself up for a financial future that can be much easier to cope with in your old age because you own an asset that’s still appreciating, instead of owing monthly rent payments that will only continue to rise.

If you ever get to a point where you can no longer maintain your home or live alone, you have an asset that you can sell that will provide for you in those later years when lower income and high health care expenses can take a toll.  A renter doesn’t have this option.

To conclude, it’s obvious that the housing market has been terrible over the last few years, and a few uninformed people may try to convince you to be a perpetual renter because homeownership is too “risky”.  But when it comes down to it, long term homeownership is far less risky than renting ever will be.

 

Additional Reading:

Is Buying a Home a Good Investment?

“I Bought a House!” series (Read part 1part 2part 3part 4 , and part 5)

 Is Buying a Home a Good Investment?

Is it Better to Rent or to Buy?

Homeownership- Should You Buy or Should You Rent?

12 Wise Steps to Buying a Home (Part 1)

12 Wise Steps to Buying a Home (Part 2)

Buying a Home- Is It a Good Investment?

More posts on Real Estate

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  • Phil

    As another commenter mentioned, you miss the boat in not factoring in the opportunity cost an owner has by not 1. being able to save and invest a good chunk of the spread between monthly rent and ownership costs and 2. the opportunity cost on the returns earned by a renter not tying up cash in a downpayment. Also, a lot of homeowners fund large purchases by “tapping into their equity” via HELOCs which is really just more debt and more interest.

    • http://www.CFinancialFreedom.com Dr. Jason Cabler

      Good points Phil. There are tons of factors to take into account when it comes to buying vs. renting. But in the end, it depends on your individual situation. You just have to take all factors into account that you possibly can and decide which is best for you. There are advantages as well as lost opportunities on both sides of the argument.

      I think this is one of those subjects that would really take more than one blog post to fully analyze all the possibilities. Might even take a short book to cover it all!

      Thanks for the comment!

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  • Mike

    I like how you took the time to run the numbers. Of course, there are other factors to consider when renting versus buying, like how mobile you need to be for your career. However, I think to few people take the time to look at the math behind their choices. Great article.

    • http://www.CFinancialFreedom.com Dr. Jason Cabler

      Thanks, I always had a feeling that the numbers weren’t as clear cut as many people believe. But once I ran the numbers and wrote the article I realized that the greatest advantage to owning comes AFTER you pay off the house.

      • Felix

        There is one thing you left out of your analysis. The $154,000 that the renter saved were hopefully invested in broad stock indices, which yield an average of 9% over those 30 years. Saving about $5,000/year for 30 years, at 9%, that gets the renter to about $770,000 in liquid assets. That completely blows away the paltry return on the house. Your owner would have a $30,000 gain on his house, plus whatever retirement portfolio. Your renter would have this $770,000 plus whatever retirement portfolio. We have to assume that in both cases, the retirement saving are similar, and also hold other conditions constant, but I think the math is pretty !clear

        • http://www.CFinancialFreedom.com Dr. Jason Cabler

          That may be correct. However, rent will be an ongoing commitment for life, and that commitment will continue to rise with rising rent, so that’s something to take into consideration that will eat away at that $770,000.

          Also, as a practical matter, how many people will actually save the difference between renting and owning to put into investments? Very few I would imagine.

          Thanks for the comment, Felix!

          • Felix

            Well, you do get to the crux of the issue here. Are most people disciplined enough to invest their savings? Sadly, since most Americans are addicted to spending, buying a house provides a forced saving mechanism, no matter that the return is miniscule. But, the fact remains that with the right discipline, a 65 year old with a nest egg that is $770,000 greater than it would be if he owned instead of rented, that would a very happy retiree.

          • http://www.CFinancialFreedom.com Dr. Jason Cabler

            Amazing what a little discipline can do, huh?

          • Morteza

            Thanks for your article. I agree with Felix. The difference between rent and house payments over 30 years can make a huge difference…

            Also, if you rent, you dont have to live in the same house (which soon will become old and you think of moving), same city, same country for 30 years…:)

            Anyway. my conclusion is that not to buy a house if you have a good salary and have a mobile career and can manage your earnings and save and invest it in other forms.

          • http://www.CFinancialFreedom.com Dr. Jason Cabler

            Definitely if you have a mobile career, a house may not be a good idea. If you have to move every few years, it would be very difficult to build equity due to selling fees you’d have to pay every time you move.

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  • http://www.ontargetcoach.com/ Brent Pittman

    $500 rent would be a dream in Los Angeles. For many in our area, buying a home is also a dream especially since 15-20% down is the new normal. Watch out Californians are coming and we’re going to buy all your cheap houses. 

    • http://www.CFinancialFreedom.com Dr. Jason Cabler

      I would imagine $500 is unheard of in LA.  It’s low for here in Nashville but not uncommon at all.  I do think you’re right, we get a lot of people moving here because of the cheaper living expenses all the way around including housing, property taxes, and no state income tax.  Tennessee is the bomb!

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