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.
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.
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.
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)
Buying a Home- Is It a Good Investment?
4 Smart Move to Achieve Financial Peace of Mind