Should I Rent or Buy?

Let’s explore this age-old question. Should you rent or should you buy?

This question haunts Millennials, young and old, and even the Baby Boomers. We’ve all heard all of our lives about the American Dream – owning our own home, with the pride of a well-kept yard and white picket fence. But times are different from when that dream first arrived. We are sinking in student loan debt and fighting to get that perfect job. So let’s take some time away from design today, and see whether you should rent or buy your next design palace.  

Let’s go through the pros and cons of buying and renting, and you can build your own case for whether you should buy or rent. 

 

Pros of Buying 

  • You have an asset. The more you pay down your mortgage, the more equity you have. This means that you are getting closer to full ownership with these payments, instead of throwing your money away on rent which does not go towards any asset.

  • Real estate typically appreciates in value over time. According to Zillow, home values in the United States increased by 8.3% from 2017 to 2018. That means that if you bought a house last year this time at $200,000, it would be worth $216,000. You can eat, drink, and sit on the toilet without lifting a finger and effectively have more money.

  • The good old government allows you to deduct the interest you pay when you pay down your mortgage from your tax bill. This is essentially a tax break for you.

  • Owning a home forces you to save your money and invest it into an asset. If you do not have the discipline and time to plan how you should invest your money, a mortgage will force you to contribute to your financial future without having to think deeply about it.

  • The pride of owning a home is unmatched. It is one of the main components of the American Dream. Owning a home is one of the only times you can seriously pat yourself on the back for having something entirely yours (except for the fact that you owe the bank money…I know – I said I would get into the cons later). You can be as creative as you want. You can paint each room a different color of the rainbow.

 

Cons of Buying 

So many fees…

  • We can often times forget that the mortgage is not the only monthly expense when you purchase a home, but we will have other fees as well, such as:

    • Property taxes

    • Home insurance

    • HOA (Home Owners Association) fee

        Though your home insurance will be relatively stable and you might not have a HOA fee, property taxes can get very large as time goes by and must be incorporated in your calculation of how much you will have to pay in taxes maybe ten year down the line. 

  • Repair costs can be very sneaky. Say that your roof needs to be replaced (which should happen every 25 years). That will cost you around $7,000 to replace, according to Home Advisor.

  • You not only need to think about repair costs, but also general remodeling costs. If in 20 years your kitchen cabinets are outdated or you want to replace the tile in the bathroom, that’s going to cost you. Home Advisor states that the average national home renovation costs are $10,360.

  • Let’s not forget about buying and selling costs when you close. Here are the buying costs you could incur:

    • Appraisal fee

    • Home inspection fee

    • Application fees

    • Attorney’s fee

    • Prepaid interest

    • Loan origination fee

    • Mortgage broker fee

    • Property tax

    • Homeowners insurance premium

    • Title insurance

    • Title search fee

  • Here are the selling costs you could incur:

    • Real estate agent fees

    • Mortgage payoff

    • Staging costs

    • Home repairs

Now that we’ve been through the fees, lets move on to other cons. 

  • There is an opportunity cost of your down payment. Instead of putting that $20,000 down payment towards buying that $100,000 house, you could use that $20,000 to invest in say the S&P 500 index. The S&P 500 has grown on average by 10% since its inception in 1928 according to Investopedia, so that $20,000 could be $22,000 in a year and $24,200 in two years. Hypothetically, you could make all of that money without taking on a huge debt and incurring all those costs we talked about above, and end up actually having more money than buying that home in 3 years time. 

  • All that money you’ve put into buying the home and all that money you gained from appreciation is locked into the square that is your home. If you lose your job today, you can’t just sell your house tomorrow and get money to pay for your everyday expenses. But you could do that if you invested in the S&P 500 index. 

  • Buying a house influences the way people view themselves. Often times when you have accomplished the great feat of buying a home, you think you need to upgrade your lifestyle. You buy all new furniture, while when you were renting you were happy to go to Craigslist. You might buy expensive kitchenware because this is your house and you want it to be perfect. All of this spending can rack up pretty quickly and you realize that the only way that you’ve been keeping up with the Joneses is because you are deeply in debt.


Pros of Renting

  • Like I explained in the the cons of buying, you can invest your down payment so that you are making a return on your money that is actually greater than the amount of equity you have in your home. So, you could actually make way more money renting.

  • Renting allows you to be mobile. If you get a new job opportunity in another city, state, or country, you can pick up your bags and leave. Good luck with that if you have to sell your home, which could take months or maybe a year.

  • Your are not responsible for maintenance and selling costs. This fact will spare you from the countless headaches you could have as a homeowner who is constantly reaching for their wallet.

 

Cons of Renting

  • Like I said in the pros of buying, renting is basically like throwing your money to someone else so that they can pay off their mortgage and have an asset at the end of the day. Yes, we all need housing. But if you live somewhere for 30 years, don’t you want to own the place that you live in?

  • Rent increases every year sadly. It can really hurt if you live in a growing city and you see your rent increasing by a couple hundred dollars every year.

  • It has to be said. There are crazy landlords out there. Everyone has heard of a lying, cheating, stealing landlord who is only out for themselves and takes a month to fix the leaking ceiling. Sometimes the headache of having to fix a roof that is yours is better than having to deal with a crazy person that can evict you at a moments notice.


Other Factors to Consider

The reality is that there are many factors to consider when you are making the huge financial decision to rent or buy. You also need to think about these factors: 

  • The general housing market. Do you live in a city where home prices are skyrocketing and there are a plethora of job opportunities. The reality is that places like San Francisco and New York will more than likely always be expensive and home prices will increase because there are so many job opportunities. In these places, renting can be more expensive than buying and you might as well buy because you know the home value will appreciate greatly.  

  • The rate of return of your down payment investment. So if you decide to invest your down payment instead of buying a house, what are you going to invest it in? Make sure you looked at the historical rate of returns for that investment option. Yes, no one necessarily knew that Amazon would increase so much in value over the last 10 years, but in retrospect you could have invested in Amazon and made way more money than buying a house.

  • The length of time you plan to live in the house. This I think is truly the defining factor. Honestly, from my research if you plan on living in a place for several years, it makes sense to rent. You can make more money with other investments and have the benefit of mobility. If you plan on staying for longer, you should buy. That could be say if you’re planning on living there for 7+ years. BUT note, you need to run the math for yourself. Go to a buying vs. renting calculator to see what is the best option for you.

 

What do you think? What’s right for you? Renting or buying?

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