Renting Versus Buying a Home – Four Questions

When considering renting versus buying a home, forget the biased advice of those who think it is always better to buy. Instead, consider the important questions you need to ask. Here are four of them.

1. How long will you be there?

Generally, if you will be moving in the next few years, you’ll be better off renting. Of course this wasn’t true during the last real estate bubble, when home values in some areas were going up 20% or more annually. But then some of those who timed it wrong and bought in the summer of 2006 saw a 20% decline in value in the following years. How would you like to be facing a move when you owe more on your home than it is worth? Unless you want to gamble, consider buying only when you’ll be in the home for a while.

2. What will the cost of owning the home be?

Add up all the various costs. Include the mortgage payment, taxes, insurance, utilities (guess if you have to), any immediate updates or improvements you’ll be making, and a reasonable amount for maintenance. Figure the total average monthly cost of owning the home. Once you have that, you need to answer the next question.

3. What is the cost of renting a home?

Include rent plus renters insurance (if you’ll buy it) plus utilities (guess). Now you have a basis for comparison. If it’s dramatically more expensive to buy, it may be better to rent for now and bank the difference. For example, a few years ago we lived in a city where a home that was worth $160,000 could be rented for $750 per month. Utility costs would be the same in either case, and the total cost of owning worked out to about $1,250. Had someone bought the home then, they would be in a home today that is worth about the same $160,000 (that was the top of the market). Had they rented and banked the $500 per month difference, they would have almost $20,000 saved today, meaning they would be that much further ahead if they bought that home (or a different one) now.

There are a few more things to note here. Some of that mortgage payment is principle, not interest. In other words some equity would have been built up even without a rise in value – but not much. Of course if the home were sold now, there would be expenses associated with that sale, eliminating any equity gained. On the other hand, rents can rise, while a fixed rate mortgage payment will remain the same. All of this gets back to the first question about how long you’ll be living there. The longer the time, the more likely it is that buying makes more sense, at least financially. But don’t skip the next question.

4. Do you want the responsibility?

As you can see from the example above, renting versus buying a home can be the smart move at times. But even when buying puts you further ahead financially, that is not always the final determinant. I like owning a home, and in large part because of the financial advantages. But my wife and I also plan to stay here a long time. If not, we might be renting, because I don’t actually like taking care of a house.

It is something to consider, especially in those situations when buying may have such a clear asset-building edge over renting. A landlord takes care of the roof, the heating system, the painting, carpeting, and even the yard work in many cases. With your own home, all of that is in your responsibility, along with buying and repairing large appliances, resurfacing the driveway and spraying for bugs. Do you want the work of being a home owner?

Eventually most people probably should buy a home. The cost of owning a home usually won’t go up as fast as rents, at least if you have a fixed-rate mortgage. Nobody can tell you to leave. A house is a great way to build assets too. After all, even when renting versus buying a home costs less each month, how many renters really do bank the difference? But as you can see from the questions above, there are times and situations when renting makes sense.

 

Copyright Steve Gillman. To see a photo of the house we bought for $17,500, get a free ebook on how to buy Inexpensive Homes, and a free real estate investing course, visit: http://www.HousesUnderFiftyThousand.com

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