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 an investment-like return on your money.
In some cases you can make a decent returnon your investment over 15 or 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 away money . So when it comes to the question of buying vs. renting, what should you do?
What's Your Situation?
The first thing you should do is assess your personal situation. In some cases it's wise to rent rather than buy if your present situation demands it. Here are a few questions to ask yourself:
- Do you see yourself living in this location for at least five years?
- Are you planning on getting married within a year or two of purchasing a house?
- Are you willing to take on the responsibilities and expenses of owning a home (repairs, property taxes, etc.)?
- Are you financially ready (not living paycheck to paycheck, have an emergency fund, have a substantial down payment, no consumer debt, etc.)?
Will You Own the Home for at Least Five Years?
When you buy a home, it's a good idea to know how long you plan to be there. If you plan on being in a home for less than five years, it's not likely the best financial move. Unless home prices are appreciating quickly, your home may not appreciate enough to cover the closing expenses you paid to buy the house. Buying the next house, along with all the expenses involved, can cause you to lose equity.
Getting Married?
If you plan on getting married within a year or two of buying the house, it's a good idea to hold off on your home purchase. Once you add a spouse into the mix, the house you choose probably won't fully suit your new spouse. Just keep piling up more cash for your down payment, then once you put a ring on it, both of you can buy a house that serves your needs as a couple.
Homeowner Responsibilities
You should understand that owning a home requires additional responsibilities (financial and otherwise) that you don't have when you rent. For instance:
- Paying property taxes
- Repairs- do them yourself or hire someone to do them for you
- You will need to purchase home insurance
- You may have to deal with a homeowner's association
- Routine maintenance- keeping the grass cut and the exterior presentable
If you're not completely ready to take on the financial and maintenance responsibilities of owning a home, then you may want to rethink owning for now. Keep building your savings and revisit the decision to own later when you're in a better position.
Are You Financially Ready?
Buying a home is a big step. You'll need to make sure you are finanacially ready to purchase and maintain it. First, it's wise to make sure you have total control over your money. If you're living paycheck to paycheck, then owning a house will be an even bigger strain on your finances.
Do you have a large down payment? Of course, it's best to pay cash for a house, but if you can't do that (most people can't), then you need to put as much down as possible. Taking out an interest only mortgage or putting only 3% down is an indicator that you're not financially ready to own a home. Put down a minimum of 10%. It's more wise to put down at least 20% so you can avoid paying PMI
Do you have an emergency fund in place? If not, what will you do if the HVAC dies or your fridge goes kaput? You need to have money ready to deal with these problems so you don't end up in continual debt.
Buy or Rent, What Should You Do?
The best way to find out whether to buy or rent is to compare the numbers. The median price of a home in the first quarter of 2022 is $428,700. If you spend this much on a house with a 30 year mortgage at a historically average 7.76% rate, and spent $125/month on maintenance, $175/month in property taxes, and $75/month for insurance, at the end of 30 years you have spent $1,106,640 ($3,074/month).
However, at a rate of appreciation of 3% over 30 years, your house would only be worth $1,040,567. That means that over a 30 year period, you lost $66,073, or about $2,200 per year on your investment.
That doesn’t sound so hot.
What About Renting Instead of Buying?
Now let’s take a look at the numbers in the buy or rent scenario 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.
Running the Numbers on Renting a Home
Let’s assume that today you pay $1,326/month rent, which is the average U.S. rent in 2022. Of course, over time, rent increases, so we’ll assume that at the end of 30 years you will be paying around $2,600/month in rent. Over 30 years the result is that you have paid an average of $1,963/month in rent during that time.
So over a 30 year time period (360 months) you’ve spent a total of $706,680 in rent ($1,963 x 360 months). Add in renters insurance at $30/month for 360 months and you get $10,800.
That comes to $717,480 ($1,830/month) spent on rent and insurance over 30 years. Not too shabby! That’s $389,160 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 $1,081/month less than if you had bought a house.
That’s definitely 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 $389,160 less over the years, but you have absolutely nothing to show for it. You continue to have a rent payment every month which will certainly continue to increase over time.
If you continue renting into your old age, in 25 years you will spend another $720,000 on rent ($2,400 x 300 months) at a time in your life when income is usually very limited. This number assumes the rent never goes up over 25 years, so this estimate is actually very low.
However, when you own a home instead of rent, at the end of 30 years you have no more house payments and you have a physical asset worth $1,040,567, which will 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 mostly be offset by the appreciation of the value of the house.
This valuable asset will come in handy if/when you ever need to downsize to a smaller home or live in a nursing home. It's also a substantial asset you can leave to family members or give to charity when you die.
Home Ownership is Key to Building Wealth
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 to 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, the housing market always has its ups and downs, and a few uninformed people may try to convince you to be a perpetual renter because homeownership is too risky or expensive. The option whether to rent or buy will always be debated. But when it comes down to it, the numbers are clear that long term homeownership is a key for building generational wealth, and is far less risky than renting will ever be.
Additional Reading:
Is Buying a Home a Good Investment?
“I Bought a House!” series of posts about my house flip
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)
I hate your assumptions.
First of all apples to apples a $200k home is going to rent for at least $1200 a month not $500 a month.
Second you don’t take into account the tax benefits of writing off your interest expense, taxes, and insurance. That’s a savings of 15-30% depending on your tax bracket.
I would like to know where you can find a nice home to rent for $500 a month. When I was finally able to buy my home my housepayment was $250 less than my rent payment had been for the previous 15 years that I rented. My landlord didn’t do a thing to maintain the home. We did all of the repairs and maintainence. I’m saving money every month owning my home. I can also take part of my payment (the taxes and interest) as a deduction on my taxes. I couldn’t do that with rent!
$500 rent is hard to find most anywhere in the country. With interest rates being so low now, it’s very easy to get a mortgage for a house for quite a bit less than rent. Problem is, there are a lot of people who can’t qualify for a mortgage, so they are destined to rent until they can do what it takes to get a mortgage. Rents are usually higher because you are paying the owner’s mortgage plus expenses for repairs and such. I think owning is better in most cases.
In this economy where you need to go where the jobs are, renting makes more sense than home ownership did. If you are looking at opportunity costs for a young person, renting is the way to go to be truly mobile and be able to take advantage of upward growth opportunities.
If you anticipate moving within 5 years, renting is probably your best option. But if you own your own business or have a very reliable job, home ownership is probably better because it’s very unlikely that you will have to move to another city to find a job.
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.
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!
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.
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.
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
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!
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.
Amazing what a little discipline can do, huh?
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.
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.
Rent costs more than a monthly mortgage payment including escrow and repairs. So it would work in reverse and the home owner would be saving $5k a year not the renter.
$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.
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!