Have you ever asked yourself the question “is it better to buy or rent” when it comes to finding a place to live? 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.
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.
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.
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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.
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