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Home Ownership in a Transient Culture

How do you know if it’s more beneficial to buy your home or to rent? The New York Times recently shared a buy-or-rent calculator that considers important costs associated with buying a house and will calculate the dollar amount that would make renting more beneficial for your budget. Once you plug in your numbers it will tell you “If you can rent a similar home for less than ___, it is cheaper to rent than to buy.”

Home Ownership: To Buy or Rent?

home ownership

Of course I plugged in my numbers to see if we were actually benefiting from buying our condo 3 years ago. Thankfully I learned that it was worth it to buy since there’s no chance we could find a place to rent for the cost they computed. Learning the factors they used in their formula did open my eyes for what I want to consider down the road if we eventually decide to move to a different home.

If you’re too lazy to read the article and check out the calculator, here are the factors to consider:

1. Home price
2. How long do you plan to stay?
3. What is your mortgage rate?
4. How much of  a down payment did you have?
5. What is the length of your mortgage?
6. What is the home price growth rate, rent growth rate, investment return rate, and inflation rate for your area?
7. Property tax rate
8. Closing costs
9. Maintenance & fees
10. Security deposit & renters insurance if applicable

Home Ownership in a Transient Culture

Our generation isn’t like my parents’ where you live in the same house for 30+ years and retire from the first job you ever had. It’s not the case with careers either since job changes after just 5 years seems to be the norm. My husband and I joke that since we live near a University we keep getting older and everyone is staying the same age! Folks move here for medical school or grad school and are only here for 2-5 years but most of those friends still buy a home. For only being here 2-5 years they still front the money for a down-payment and closing costs.

Depending when you buy, you’re also taking a chance that your house will be worth more than or equal to what you bought it for when you move.

For example, my sister and her husband bought their condo in San Diego back in 2008 right before the housing market crashed and it took until this year (8 years later!) for the value to finally break even and exceed what they purchased it for. They didn’t have a deadline for when they wanted to move so they were fine waiting for the housing market to get back on its feet but it would have been a significant loss if they only planned to stay in this condo for 2-5 years.

In an opposite situation, friends of ours in Michigan bought a home during a market low in 2010 and just sold it last year for $65,000 more than what they paid without doing anything to it other than a simple paint job. There are a lot of unknowns when it comes to buying a home and is a riskier option that could go really well or poorly for you.

home ownershipDon’t Play the Comparison Game

When it comes to owning a home, I’ve found in my own experience that I always want more, but when I step back I realize that we don’t really need more at all.

Before kids, we lived in an apartment for 3 years while most our other newly married friends posted a shot of their new home because it was the better financial choice for us. Now we own our 2-bedroom, 1.5 bath, 1200 sq ft. condo, and it’s working just fine for my family of four. We’d even be fine once a 3rd child comes in the picture too because my daughters could share a room and we’d have the baby in a pack-n-play in our room for the first year like we’re currently doing with my 4-month old.

However, the norm of our culture is to upgrade to a bigger home as a family grows. When I found out I was pregnant with our 2nd, we seriously considered if we should move so we’d have more room. How much room does an infant really need?? (granted, things like bouncers and swings are so bulky and do take up an entire room).

I even had a friend over last week with her 3 kids and her oldest son who is 5 years old said “Our house is a lot bigger than yours and it has WAY more toys.” Of course his mom was shocked that those words came out of his mouth but in his defense all he knows is a huge house where they all have their own bedroom and an extra play room dedicated for their toys. We also bought our home where it is because it allows my husband to walk or bike to work meaning we only need one car which cuts down on our expenses.

Looking back, I’m glad we crunched numbers and established a max we would spend on a home because the bank approved us for a much bigger loan than we even needed, which for many would make it tempting to get a little more house with that money. If we’re not careful, we might find ourselves seeking more when we can be perfectly content with what we have. Whether you choose to buy or rent, it’s all about perspective since everyone’s situation is a little different. Definitely do the math but make sure you’re also checking your emotions and avoid comparing what you have with others.

Is it more beneficial to buy or rent where you live?

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

10 Comments

  1. Love the NY Times calculator. Very well done and informative. A lot of people think that buying is always the best option, but as you stated, the numbers just don’t always support that. Especially if you’re not going to be in the area for an extended time period. Nice write-up

    • Thanks, Larry. It sure gave me something to think about if we ever decide to move.

  2. I bought a house a few years ago and I really didn’t like it, chores around the house kept me busy all the time. I sold it and rented afterwards. For me, until I have a large family, I’ll probably keep renting a small apartment. And, what’s the point of having so much extra space?

    • You’re right, Charlie- the bigger the box, the more you can fill it with. My parents have a room in their house we call the “sitting room” not because people sit in there but it’s where we throw things you don’t want to deal with and they sit there.

  3. I just saw a really interesting discussion about this in one of my FB financial groups. People from all walks of life chimed in with their experience and two cents. Your article is aptly timed. Well done.

    • That would be interesting to hear! I’m sure there are a lot of case-by-case situations but it would still be helpful to hear experiences and avoid the same mistakes if you can.

  4. Owning a massive liability is often not the right choice and people usually forget to factor in the large amount of maintenance the house requires.

    To buy then sell the house will cost you around 10% of the value of it, once you add in agent fees, attorneys fees, closings costs, etc… Add in your yearly taxes and insurance and you realistically need a house to appreciate by 15-20% before you break even in value.

    Then don’t forget you paid your mortgage all that time which is probably equal to or higher than your rent was.

    I personally advocate ownership of rental property, and then buy a home when your passive income exceeds the costs of living there.

    • Thanks for your insight, Eric. A friend of mine took the same route you mentioned and is seeing great gains from it.

  5. It’s actually cheaper to buy in Australia at the moment with such low interest rates, but once you throw in additional on-costs such as strata etc, it can still be very expensive.

    • I think it varies widely in Michigan depending where you live. That’s smart to consider all the extra costs that are added in or paid up front even though interest rates are low.


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