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.