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Buy or Rent a Home, Which is Better?

Buy or Rent a Home, Which is Better?

Have you ever asked yourself "would it be better to buy or rent” when you need to find a place to live? If you saw my previous post “Is Buying a Home a Good Investment?” , you discovered that sometimes a home may not always be a good investment if your goal is to get an investment like return on your money. should I buy or rent house

Sometimes you may be able to make a decent return over 30 years, but in a lot of cases, the home's appreciation just doesn’t keep up with all of the expenses like property taxes, maintenance, mortgage interest, and insurance, which can result in a negative return on your investment in a home.

However, so many times we’ve been told that buying a house is a good investment, and that renting is basically throwing money away over the long term. So when it comes to the question of buying or renting, what should you do?

Buy or Rent, What Should You Do?

The best way to figure out whether buying or renting is better is to get down and dirty with the numbers. First, you can look at the numbers from my last post and discover that if you bought a $200,000 house using a 30 year mortgage at a historically average 6% rate, and you spend $125/month in property taxes, $125/month on maintenance, and $45/month for insurance, after 30 years you've spent $519,876.

However, at an appreciation rate of 3% over 30 years, your house would only be worth $491,368. Simply put, over a 30 year period, you ended up losing $28,508, or around $950 a year on that investment.

That doesn’t sound so hot.

So What About Renting Instead of Buying?

Now let’s check out at the figures when it comes to renting.

First, there’s a little positive news here. When you rent you don’t have to worry about maintenance costs, you don’t pay interest on a mortgage, you don’t pay property taxes, and renter’s insurance is tiny compared to homeowner’s. Sounds like a pretty fair deal so far!

In order to crunch the numbers on renting we'll first have to make some assumptions.

Let’s assume that you're paying $500/month rent, which is probably a conservative estimate for most areas. Of course, over time, your rent will increase, so let's assume that at the end of 30 years you'll be paying $1,500/month in rent. Over that 30 year span the result is that you've paid an average of $1,000/month in rent during that time frame.

So over that 30 year time period (360 months) you ended up spending a grand total of $360,000 in rent ($1,000 x 360 months). Add in renter's insurance at $15/month for 360 months and you get a total of $5,400.

That comes to $365,400 paid for rent and insurance over 30 years. Not too bad! That’s $154,476 LESS than you would have paid for owning a house during that time.

Looks like you saved a ton of money!

By renting you would have spent $429/month less than if you had bought a house and paid a mortgage.

That’s something to think about.

But now let’s look at what you end up with at the end of 30 years. If you’re a renter, yes, you spent over $154,000 less over the years, but you have absolutely nothing to show for it. You also still have a rent payment to meet every single month, and the rent will not be going down.

When you continue renting into your old age, after 25 years you'll end up spending another $450,000 on rent ($1,500 x 300 months) during a time in your life when your income is typically very limited, and that number assumes that the rent never goes up over that 25 years, so actually that number is very low.

But when you own your home instead of renting, at the end of that 30 years you have no more house payment to deal with, and you have a physical asset worth $491,368 that is still going to continue to appreciate over the years. You'll still have expenses to pay like insurance, property taxes, and maintenance, but those expenses are much less than rent and will actually be offset by the appreciation in the value of the house.

I won’t bore you with any more numbers, but I think it’s pretty clear that owning a home instead of renting is much better for the long term because you’re building equity as long as you own that home, and you set yourself up for a financial future that ends up being much easier to deal with in your later years because you own a physical asset that’s still appreciating, instead of owing rent payments every month that will only continue to rise.

If you ever get that point where you can no longer maintain your home or live by yourself, you have a valuable asset that you can sell that will provide for you in those later years when lower income and higher health care expenses can end up taking a toll on your personal wealth. A renter doesn’t have this option.

In the end, it’s obvious that the housing market has been awful over the last few years, and a few uninformed people may try to convince you that being a perpetual renter is wise because homeownership is too “risky”. But when it comes down to it, long term homeownership is far less risky than renting will ever be.

Additional Reading :

Is Buying a Home a Good Investment?

"I Bought a House!" series (Read part 1,part 2, part 3, part 4 , and part 5 )

"Dr. Jason Cabler is a Christian personal finance blogger, author, and speaker. He teaches how to get out of debt and live a debt free lifestyle through his Celebrating Financial Freedom blog and self study course . His new book "How to Budget- The Quick and Easy Guide to Making a Budget That Works" is now available ( more info here ). He can be reached for interviews or speaking engagements by email , and can be found on Twitter , Facebook , and Google + ."

Comments

 

Buy or Rent a Home, Which is Better? - Celebrating Financial Freedom | Celebrating Financial Freedom | Scoop.it said:

Pingback from  Buy or Rent a Home, Which is Better? - Celebrating Financial Freedom | Celebrating Financial Freedom | Scoop.it

September 5, 2012 8:18 AM
 

Buy or Rent a Home, Which is Better? - Celebrating Financial Freedom | Debt Free | Scoop.it said:

Pingback from  Buy or Rent a Home, Which is Better? - Celebrating Financial Freedom | Debt Free | Scoop.it

September 5, 2012 8:18 AM

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