Should You Rent or Buy?

The following is an excerpt from Buying a Home: The Missing Manual. For more on this subject, see The Eternal Question: Rent or Buy?

Home ownership is a big step, and many people worry whether they're ready to take it. If you currently rent your house, you may wonder if you can even afford to buy a home. Just looking at real estate listings online or in the Sunday paper can make you break out in a cold sweat. Yes, homes are expensive. But they're also an investment—and for many homeowners, it's one of the smartest investments they'll make. Depending on how much you currently pay for rent, how expensive homes are in your area, what your credit score looks like, and how long you plan to live in the house (among other factors), buying a home is often less expensive than renting in the long run. After all, when you rent, you just pay for a roof over your head. When you buy, you become the owner of that roof—and everything beneath it.

Renting does have its advantages. Here are some:

• Renting offers more flexibility. If you like knowing that you can pack up and move at a moment's (or a month's) notice, it may make more sense to rent. Depending on the terms of your lease, you're not tied to a residence for more than a year or two at most. When you own a home, on the other hand, you need to sell the property or find a suitable tenant before you can move—or else you'll end up paying a mortgage on an empty house.

Tip: If you know you're likely to move within three or four years, you're probably better off renting than buying. That's because you won't have time to build up much equity in your house (its cash value as you pay off your mortgage's principal) or break even on your closing costs.

• Maintenance is someone else's headache. When you rent, you call the landlord if a pipe bursts or the furnace quits. He sends someone to fix it—and takes care of the bill. When you own, all the maintenance—from keeping everything in good repair to mowing the lawn and shoveling snow—is your responsibility.
• You can move in faster. Buying a house takes time. If you're in a hurry to move to a new neighborhood, you might want to rent for a year and look for a place to buy during that time. Renters can usually move in soon after getting their rental application approved. Buying a home, on the other hand, takes months. You'll be living in your new house for years, so you want to take your time finding just the right home. Then you may spend a couple of weeks negotiating with the seller before you agree on a price and conditions. And getting financing and preparing for the property transfer can take 30 days or longer.
• Your move-in costs are lower. Renting a house usually involves no more up-front costs than two months' rent and a security deposit. Buying a home is far more expensive. You need a down payment of anywhere from 3.5 to 20 percent—or more—of the home's purchase price and thousands of dollars more for the fees and costs associated with getting a mortgage (Chapter 9 gives you a rundown of what those are).
• You can keep your money in the bank. Being a first-time homeowner frequently means scraping together all the money you can find to afford a down payment and closing costs. Once you buy a house, your money is tied up in your home. After you built up some equity (cash value in the house as you make principal payments), you can tap into it with a home equity line of credit (Section 1.1.2.2). But if you want your money readily available (especially within the next few years), or if you want to invest in something other than real estate, it may make more sense for you to rent.

If you're thinking about buying a home, you're already aware that buying has its own advantages. Here are some major ones:

• Say goodbye to your landlord. It irks some people to pay good money each month and not get anything more in return than the right to live under someone else's roof. When you own your home, each mortgage payment builds up your equity in the house—not much at first, but it increases with time (Section 1.1 explains how that works). Some landlords are great, but others are slow to make repairs—and quick to raise the rent. If you want to feel like your home is your own, you might be ready to buy.
• Take advantage of tax breaks. You can deduct mortgage interest, property taxes, and some closing costs from your federal income taxes. (For the tax savings to make a difference the deductible items must add up to more than the standard deduction—and you'll have to itemize all deductions to claim this tax break.)
• Beat inflation. As the cost of living goes up, the cost of rent goes right up with it. If you use a fixed-rate mortgage (Section 7.3) to buy a home, however, your principal and interest payments stay the same for as long as you live in the home. The longer you stay there, the more pronounced this benefit.
• Build equity. Renting is pay-as-you-go; as long as you pay your rent and abide by the terms of your lease, you can live in your home. But if you buy, as you make mortgage payments and as home values rise, you gain equity in your home. You can treat your home's equity like a savings account, cashing out when you sell the home and using the money for a down payment on your next home. Or you can borrow against it using a home equity line of credit (Section 1.1.2.2).
• Have your own place. For many people, the main reason to buy a home is to have a place that's truly their own. You're not paying off the landlord's mortgage—you're investing in a home with your name on the deed. That's a great feeling, whether you buy a one-bedroom manufactured home or a many-roomed mansion.

Comments

[Matt]

A house once was a safe secure investment but corporate , government and personal greed has ruined that. This whole fiasco in house has cost us who played by the rules dearly and those who played the lottery with their house in the way of HELOC and mortgages they could not repay lost it all.

My father who lived in the depression saw this coming when they developed HELOC. He said they now have the ability to take your house if you are unable to pay your debts. You now have the ability to transfer your unsecured debt with your house equity. Many did and now they lost their house.

10 years ago when I bought my house it was $217K ( probably over valued at the time) 2 years ago I could sell it for $325K now I am lucky if I were to get $185K. Pretty poor investment. But I have a place to live. It will take years if not decades to get the value back up.

Alas I feel for the innocent children who are affected by the mess and the parents who bought into the sell job.

[Strick]

Funny that even the "Have your own place" reason talks about "investing". The main reason to own is so no one can make you move (unless a highway is coming through or you dont pay your taxes) and to actually reduce risk in your finances (ongoing and inflating rents throughout your retirement years can be rough). Of course, these only apply to actually owning a home, if you mortgage to the hilt or keep borrowing against it, it owns you and seems to have the exact opposite effect.

[The Extra Money Blog]

this is a topic of much debate in my circle of friendship. i have always said owning makes sense in an appreciating real estate environment, and/or if you plan on having a 2500 sq ft + 4 bedroom type home for your family (which would typically rent out for a healthy sum and you are better off buying it).

two points above worth commenting on:

tax breaks - this is a marginal/incremental benefit at best and favors those who itemize. if you are married and file joint, you are already getting a healthy standard deduction. how much more can you deduct if you itemize is the key question.

beating inflation - sure in a "normal" economy. today however, rents are not going up. as a landlord of multiple properties across multiple states (good markets and not so good), i can tell you that rents are falling.

some other factors to consider when buying: updates/maintenance (heck replacing one compressor or furnace can cost an arm these days), mobility/flexibility in life (which is stated above as well).

[Everyday Tips]

Well, I used to think owning a house was a good thing, but not so sure anymore. At least not if you are using it as an investment that is.

It is great to own a house for the freedom and all that. However, in this economic climate I think you would be way better off to rent. There is so much maintenance with a house, plus taxes that it really needs to be viewed as a place to live and not something to make money off of.

[Old Limey]

My daughter, just turned 50, obtained a divorce 3 years ago and received a very large 7 figure settlement, and spousal support that put her in the top tax bracket for nine years. She has depended upon me to manage her investments so my decision was to invest it 2/3 into municipal bonds and 1/3 into a municipal bond fund, she earns 4.85% tax free from the bonds and her portfolio is growing nicely. Re-entering the workforce after a 20 year absence was not a worthwhile option in her tax bracket but she is doing amazingly well selling books on amazon.com. I also discouraged her from buying a home in a downtrending market and she was in full agreement that renting was her best option since her life is still in a state of flux.
Renting has worked out very well for her in spite of the fact that after an apartment, then a condo, then a home, that didn't work out well for some unforseen reasons, she is now very happy renting a small home. She has also been in a relationship for the last year with a wonderful, handsome guy that is also recently divorced (they met at eharmony.com). He is an executive, BSEE & MBA, at a prominent hi-tech company, and trying to sell his home in order to pay his ex-wife some of the proceeds and to move from a very upscale country club home in a gated community into something smaller and less expensive. Both he and my daughter still have some "issues" that will be around for a few more years so my daughter's best option in this very cloudy real estate market is to continute to rent until both she and her new boyfriend are in a position to become "significant others" and move in together. At that time they can decide how they want to legally structure the purchase of a home of their own, or become renters.

In our own case with our first home, purchased in 1963, and our second in 1977, there was never the slightest doubt - home ownership was the only way to go - an original investment of $46K in real estate became $1.1M 47 years later, apart from the benefits of living in homes and neighborhoods that are much nicer than typical rentals. Now, with high unemployment that will be with us for many years, a very uncertain real estate market, existing homes still very overpriced in our area, a lack of new homes, and the reluctance of banks to make loans, buying is no longer the obvious financial choice, since future appreciation is likely to be much lower than it was in our days. Buying will obviously always be the only choice if pride of ownership and making home improvements are things you cannot live without.

[MSC]

Unless you are lucky or wise enough to buy a house in the right market, before it gets listed on Forbes Top Places To....whatever, a house is a poor investment. Not much better than inflation over the long term, and that doesn't include maintenance.

For all the major reasons you posted however, having a home is better than renting. It doesn't always have to boil down to the math. Some people like flexibility.

In the Raleigh/Durham area, we never experienced much of a housing boom/bust that other hot markets had. In addition, rents in good complexes are higher than most 30-year mortgage payments on a $250K home. You also have to be careful staying in apartments at the low-mid range in our area because of some questionable tenants and their "activities". Many people are renting homes and finding it to be a better value, but you never know when the owner is going to sell and you have to move out.

[jim]

This is definitely not a simple black and white question as to which is "better". It depends on your individual situation and the local real estate market. In a stagnant market buying makes less sense. In a market with low property values compared to rents it makes more sense to rent. If you are likely to move in less than 2 years then buying makes much less sense. Definitely don't buy a house if you can't comfortably afford it.

[Budgeting in the Fun Stuff]

I agree with jim, there is no right answer since it depends on so much.

For Mr. BFS and I, renting was just tossing money out the window since our mortgage is only $10 more a month than our rent was when we left. I rather pay the extra $2500 a year in property taxes to own our house rather than flushing $9000 down the drain every year towards nothing permanent. We aren't moving anytime soon and didn't need that flexibility, so buying was a great option for us. In 6 1/2 years, we won't even have a mortgage payment, so we'll keep a roof over our heads for the price of property taxes and maintenance - cool beans! :-)

[Rob Ward]

We certainly didn't buy our house as an "investment." But on the other hand we didn't want to be renting anymore because we hated the fact that we were throwing money away...of course with how much interest we are paying right now we're almost throwing that away too. But I digress.

I would still much rather own a home than rent, even with the added expense. It is a nice feeling to have a place you can call your own, as opposed to just a place you live.

[BPErickson]

You don't just "throw money away" when you rent; you exchange that money for a place to live, and in our case, for heat, water, garbage removal, and the cost of occasional upgrades and repairs. Our rent did not go up at all when we resigned our lease in July.

If you take out a mortgage, you are still "throwing money away" in interest to the bank (not entirely offset by the tax deduction).

There are costs and benefits either way. What repels me from homeownership in our local area, however, is the additional risk. Debt + stagnant real estate market = more risk than I am willing to take. If I lived somewhere else, it may be different.

[crashdamage1957]

In the 80's and 90's, I still viewed my home as part of my investment portfolio, as most homes were still appreciating over most of that period. When houseing prices took a bit of a dive in the early 90's after that nice run up in the late 80's, most of the financial press were running articles like this, and looking at home ownership vs renting strictly from a financial perspective. But, now that I'm older, semi retired, and living in the hope that i'd be quite happy to live in for the rest of my life, I look at the debate from a totally non financial point of view.Its nice that the place is worth something, and its nice that its 99% paid off at this point, but now, i just view it as my home.Even if there is a higher cost to own vs rent, I neither want to have or be a landlord at this point in my life.I just want a level of privacy and piece of mind that you just don't get when you are either a landlord or a tenant.