From a person who has lived with his parents for many years and has saved a good amount of money to the student fresh out of college with massive student loans, from the married man with three kids and a wife to the single mom looking to get an advanced degree, it is hard to get a cookie cutter formula to see if buying or renting is the best for you.
Anyone in the position of finding a place to live has always asked themselves if it is better to rent or to buy. This has been debated endlessly, and each side has its die hard supporters. Many times, emotions come into play as buying a house is seen by many people as the “responsible” and “mature” thing to do. People often equate paying money to rent an apartment to money that is being wasted. And as with many age old arguments, the solution lies somewhere in the middle. The best way to look at this debate is looking at the various costs associated with each option and analyzing the numbers from there. Keeping emotion out of the debate is also key because, for whatever reason, society has glorified the act of buying a house.
There are many people looking to buy or rent, but there are so many different situations they can find themselves in. From a person who has lived with his parents for many years and has saved a good amount of money to the student fresh out of college with massive student loans, from the married man with three kids and a wife to the single mom looking to get an advanced degree, it is hard to get a cookie cutter formula to see if buying or renting is the best for you. But we have to get as close as we can to finding one so this can help you with your decision.
So let us start with the factors associated with renting. The major factor associated with renting is, obviously, the rent. It is what you pay the landlord for living in the apartment and usually any upkeep that may be needed. Most apartments take care of maintenance problems, so that provides one advantage over buying. In addition to the rent, one may have to pay for electricity and water, depending on the landlord’s policies. There are really no other additional costs to renting, which makes it simple to figure out how much you will have to pay, and usually makes it less than a monthly house payment. Many people are content with renting for years just to avoid the hassles of maintaining a property, even though they may be able to buy a house.
The process of buying a house definitely has more factors than renting ever will. Many people have had their idea of a “dream house”, and will do whatever they can to achieve it. While for the sake of this discussion we are trying to stay away from the emotions associated with buying a house, it is a factor for many people and something to keep in mind. Now, unless you have $200,000 saved up to buy a house in full, you are going to need some help in purchasing your home. This help comes in the form of a mortgage, which is a loan given to you by the bank to cover the remaining cost of the house. So if you have $50,000 saved up for a down payment, and you want that $200,000 house, the bank will gladly give you the remaining $150,000 if they deem you worthy. The reason they will gladly give it to you is because that loan has some interest, which means you will have to pay the $150,000 back and then some. Most traditional mortgages are either 15 year or 30 year loans, which means the bank will give you that much time to pay the money back by splitting it up into monthly payments according to the timeline you choose. So until you pay back the loan in full, technically the bank owns the house and not you.
Once the mortgage paperwork is finalized and in place, it is time to start living right? Wrong, because there are other costs that will need your attention every month. One such cost is home maintenance, which includes replacing broken appliances, mowing the lawn, trimming the hedges, etc. Anything that goes wrong or needs fixing on the property is your responsibility. Another cost will come from paying property tax. Now, this can vary depending on where in the country you live, but it is still a cost and it is something you would not have to pay if you were renting. On a side note, property tax paid can usually be deducted from your taxes, so that can take the sting off a little. But it is like saying you will get 30 cents back for every dollar you spend. Someone still has to pay that remaining 70 cents, and that someone will be you. Finally, depending on if you had a large enough down payment, you may have to pay mortgage insurance, yet another cost. For a similar property, adding up all of these costs usually will end up being more than a monthly rent. But the main advantage of buying a house is that they increase in value over time, so buying is always better, right?
Well the answer is maybe. As we have seen with the recent housing crisis, many people have lost their homes because their houses, which they could not really afford in the first place, plummeted in value, and they just could not afford the monthly payment anymore. The fact is that buying a house is a risk, and just like any risk, you might come out ahead or you might come out behind. But if you do your homework, you can help lower that risk. Broadly speaking, there are three main things banks look at when they decide whether or not to give you a mortgage: your credit score, job stability, and down payment. Historically, those standards have held pretty tight, and people with 20% down payments and good credit scores were the ones that would buy houses. Well, something happened in the early part of the last decade which made banks willing to loosen their standards in giving out loans. Now people with little to no down payments and horrible credit were being given loans to buy houses. And because housing prices were rising, people or banks did not care, because they could just sell the house for a profit if they could not afford the payments. But then in 2008, the prices went down, and people could not make the payments or sell the house, so they just left their houses, leading to the many foreclosures we have seen. The economy is still recovering from this, and those who thought they could buy when they should have been renting are suffering for it.
There is a lesson in all of this, and that is that buying is not always better than renting, and conversely renting is not always better than buying. Some people love fixing things so buying is not a big deal for them. Some people hate fixing things so renting is more for them. Everyone has different tastes and different financial situations, so there is not one answer that fits all. The best thing to do is to objectively look at the numbers and decide where you would like to live and why. So while family and friends may be well-intentioned in giving you their home-buying advice, the numbers tell the real story, so try your best to stick to them. The Khan Academy has a great spreadsheet titled “Home Purchase Model” you can use that will help you find out your approximate monthly payment for renting or buying, and will compare the financial effects of the decision for years to come.
So take your time, do your due diligence, and make the best decision for you. And always keep in mind the house we are building for ourselves in the next life with our deeds in this one. It will be our eventual abode, and we should make sure it is strong. And fortunately, I don’t think we will have to worry about property tax there.