Buy a Home or Keep Renting?

17 Feb Buy a Home or Keep Renting?


Rent vs. Buy a House

Should you rent or buy a home?

Myth: Renting is throwing your money away. You’re better off buying a home instead of renting.

Truth: Buying a home isn’t always the best answer, and it’s not always better than renting.

Everyone has house fever these days. With mortgage interest rates at all time lows, everyone says it’s stupid to rent when you can buy so cheaply. But they’re missing a few details of the equation. The truth is, you might be better off renting the home than buying it.

When buying a home you have to factor in the other costs. Maintenance & repairs on the home, utility costs, property taxes, and homeowner’s insurance are all added to your monthly costs. Many of these are already included in the price when you rent a home or apartment. When you make the switch to home ownership, you get the wonderful privilege of assuming these costs yourself. This is something a lot of prospective home buyers fail to consider before jumping into the deal.

Then there’s the cost of your mortgage interest. Adding the interest rate to the cost of inflation, you’re paying roughly 5% (mortgage interest rate) plus 4% (inflation)  = 9% in total compounding interest working against you in the purchase. Over the course of a 30-year mortgage, that can really add up. Now, you might be tempted to say the house is appreciating so you’re going to come out ahead. Unfortunately, the average long-term appreciation in real estate nationwide is only 5%, so you’re not really coming out ahead when you look at it. In fact, you’re losing money long-term when you borrow. The only benefit is you get to keep the house when you’re done paying all that money for it.

Granted, when you rent you’re paying most or all of the additional costs for the landlord in the price of your rent, or at least you should be if your landlord is smart enough to be profitable from his rentals. But to arbitrarily say you’re better off buying a home vs. renting a home is not always a good assumption. And you know what they say about assumptions & what they make out of us…

And we take this a little further with our rationalization and say things like “your home is your biggest asset.” This is a misleading statement. In some camps, an asset is something you own and it contributes to your net worth. But I would argue that it’s really only an asset and worth a specific amount if someone is willing to pay that amount. So if it’s not earning you money it’s not an asset, and it only makes you money when you sell it. So you tell me, is it an investment or not?

So before you make the mistake of calling your personal residence an investment, take some time to run the numbers and really think about whether it’s a good investment. Yes, by renting you’re spending money that you won’t get back, but you’re not coming out much farther ahead when you borrow money to buy either.

2 Comments
  • Anonymous
    Posted at 11:43h, 19 February

    All great points Matt.
    There are so many ways to come at this but let hit on this one:
    The real estate market hasn’t stabilized as of yet, so people have to be extremely careful and smart when they buy now. Are you going to be there long term (who knows these days, right?) to reap the rewards from appreciation? Plus, you make your money when you buy , not when you sell….
    In this economy , it’s all about flexibility. Can you pick up and move right away if you have to? What if you change employment fields? The cost (and/or mistake) of buying a house and then trying to re-sell it is far greater then renting.
    Example: lets use the least costly (most risk) type of loan just to give you the low #’s. FHA, you only need 3.5% down. On $100k, that will be $3,500 out of pocket. The seller can pay up to 6% of the closing costs….so, for the best case scenario , you would only have to come out of pocket the $3500.
    Now, more than likely , they will have a 30 year mortgage….which means they will hardly pay squat towards the principle in the first 5-7 years. Now, lets say they have to sell , for whatever reason….and lets say the market has finally hit bottom. For all purposes, the house is still worth $100k. When they sell, they will more then likely have to pay 6% in real estate commission, so the starting net point is $94,000, plus they usually (depending on which state) have to pay $1-3k in seller closing costs…so the net will drop $91-93k.
    Remember, we havent even included the closing costs when they originally bought the property….which is probably around $4k, so in that scenario , the net starting point will drop to $89k- $86k……so without doing anything, the ding has been around $14k.
    AND we haven’t even accounted for any repairs, costs to maintain, tax increases, depreciation…etc….
    It’s not just a decision of to buy or to rent………there is a huge gap, that could have huge ramifications for years to come.
    Think of it this way:what if you rented,put a $1000 security deposit down, and had almost the same payments as someone who had a mortgage. AND then saved and invested (conservatively) the amount you would lost from the above scenario.
    Who would really be throwing their money away?

    • Anonymous
      Posted at 13:16h, 19 February

      Wow. Great points Gregg! And nobody knows more about the pitfalls of real estate than someone who has lived through seven short sales. Thanks for the comment my friend.