People are having serious arguments and deep conversations about the buying vs. renting a house debacle. The traditional American dream supports home ownership and you are still not “made” until you own a home. Modern insights into the real economic of owning a home suggests that it doesn’t always make the best financial sense. In fact, quite a number of people in Europe are content to rent for life.
However, I strongly believe that all the rent vs. buy arguments are pointless – each to his/her own. Buying a home makes perfect sense in some scenarios and renting a home could be the smartest choice in other instances. This piece seeks to disabuse your mind with three questions that could help you untie the buying vs. renting knot.
How long can you stay put in a spot?
Location! Location!! Location!!! Where you choose to live wields a huge influence on practically all other parts of your life. To be honest, buying a home doesn’t make much financial sense if you don’t live in the house for at least five years. Hence, if you still have serious wanderlust, buying a home might not be smart for you because you almost always lose money when you move.
Conversely, there’s not much sense in staying in the same spot (read neighborhood or town) for five years and paying rent. The rent could have been put to better use buying you equity in a home. Hence, if you plan to stay in a place for long, it is smarter to put some roots down and buy a home. If you are not sure about how long you’ll stay, you’ll be better served renting a home.
How much money do you have?
Money answers all things! Before you decide to rent or buy, you should take the time to take a critical look at your finances to know how much house you can afford. If you want to buy, finding creative ways to save for a down payment on a mortgage is only half the battle, you still need to think about the other costs of home ownership. For instance, monthly mortgage payments, taxes, maintenance, and insurance fees are some other costs you’ll need to bear as a homeowner.
If you want to rent a home, you’ll also need to be sure that your are not overpaying for rent because you want to live in a prestigious location. You also need to be sure that the rent you are paying won’t be enough to cover mortgage payments in a similar property in a similar location. Whether you decide to buy or rent, your housing costs should ideally not be more than 25% of your take-home pay.
Have you considered the opportunity cost of buying vs. renting?
Unless you are into real estate investments or you plan to keep two homes, you can’t rent and buy a house at the same time. In essence, renting a home means you’ll forego the benefits of home ownership while buying the house means you’ll forego the benefits of renting the house.
If you buy a home, there’s the opportunity cost that you could have invested the down payment for potentially higher returns than the appreciation in the value of your property. If you rent a home, there’s the opportunity cost that the rents you pay to another person could have gone towards mortgage payments that will give you equity as homeowner.
Hence, before you decide to buy or rent, you need to be sure that you know your opportunity costs and that you are making the smartest financial decision.
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.