Renting Versus Buying a Home - Questions to Ask
By Steve Gillman - 2009
To decide whether renting versus buying a home makes sense,
ignore the biased advice of those who think it is always better
to buy a house. Consider the important questions you need to
ask instead, including the four that follow.
1. Will you be there long enough?
You'll normally be better off renting if you will be moving
in the next few years. This wasn't true during the last real
estate bubble, when home values in some areas went up 20% or
more each year, but then some of those who timed it wrong and
bought in the summer of 2006 saw a 20% decline in value in the
months that followed. You don't want to be facing a move when
you owe more on your home than you can sell it for, so unless
you like to gamble, consider buying only when you'll be in the
home for at least a few years.
2. Do you know the real costs?
The various costs of owning 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 and repairs. Start with those numbers to figure
the total average monthly cost of owning the home you're considering.
Then answer the next question so you can compare options fairly.
3. What's the cost of renting?
Rent plus perhaps renters insurance (optional) plus utilities
(guess) gives you a basis for comparison. If buying is dramatically
more expensive, it may be better to rent and bank the difference
A few years back we lived in a city where the same home that
sold for $160,000 could be rented for $750 per month. The total
cost of owning would have been about $1,250 per month. If a person
had bought such a home then, it would be worth about $130,000
now (that was the top of the market). Banking the $500 per-month
difference would mean almost $20,000 saved in a few years time.
Notice that even if the home values had risen somewhat the person
may have been better off renting. As it is, the cheaper price
today, plus the savings, would put him $50,000 further ahead
because he rented.
Now it's true that some of that mortgage payment would be
principle, not interest, so some equity (not much) would have
been built up even without a rise in value. But if the home were
sold now, there would be expenses associated with that sale,
eliminating any equity gains. Of course rents can rise too, while
a fixed rate mortgage payment will remain the same. This all
gets back to the first question about how long you'll be living
in a city or neighborhood. The longer the time, the more likely
it is that buying makes more sense - but don't skip the next
4. Are you ready for the responsibility?
Renting versus buying a home can be the smart move at times,
but even when buying puts you further ahead financially, that's
not always the final consideration. My wife and I like owning
a home in large part because of the financial advantages, and
we plan to stay where we are for a long time. Otherwise we might
be renting, because I don't actually like taking care of a house
This is a serious issue to consider, even in situations where
buying has a clear asset-building edge over renting. When renting,
a landlord takes care of the roof, the heating system, the painting,
carpeting, and possibly even the yard work. Al of that is in
your responsibility when you own, along with buying and repairing
large appliances, resurfacing the driveway, spraying for bugs,
etc. Be sure you're ready for the time and money you'll spend
as a home owner.
Most people probably should buy a home at some point. Your
cost of owning a home usually won't go up as fast as rents, at
least if you have a fixed-rate mortgage when you buy. Other advantages?
No landlord can tell you to leave, and a house is a great way
to build assets. As for the latter, consider that even when renting
versus buying a home costs less each month, most renters really
won't bank the money saved. Still, there are times and situations
when renting makes sense.
If you found this useful or interesting, please share: