One of the most debated topics in the personal finance space revolves around the question of rent vs buy.
On one side of the fence, you have the folks marching to the beat of, “You’re throwing money away when you rent… when you buy, you have something to show for it down the line.”
And on the other side of the fence are those that say, “Yeah, but renting can cost a lot less money with excess to be invested… and with fewer headaches along the way.”
Then there are the stragglers standing on top of the fence thinking, “You both have good points… does it really matter?”
I tend to relate to those folks walking the tight rope of thinking that either option is fine… if they’re executed well. There are both financial and emotional reasons revolving around the rent vs buy decision and if thought through, they both can make sense.
Let’s talk about why both choices have their pros and cons and some of the ways to ensure success with either.
Rent vs buy on the money front
When you start moving into the money side of the rent vs buy discussion, there are a lot of variables that come into play since you’re not comparing apples to apples. If you’re talking about similar houses to buy or rent, that’s somewhat easier to analyze. But once you throw apartments or shared housing like duplexes into the mix, it’s not going to be a straightforward comparison.
Typically, when you buy a house, you end up with up-front costs, recurring costs, and periodic expenses. Some of these might include:
- Down payment
- Closing costs
- Mortgage principal
- Mortgage interest
- Property taxes
- Home insurance
- HOA dues or fees
- HOA assessments
- Repairs (oh, the repairs!)
- Capital expenditures (ie a new roof)
- Closing costs (if/when you sell)
When renting, most of these costs aren’t there. Your housing costs when renting might consist more of:
- Rent payment
- Renters insurance
Not only are there going to be a lot fewer transactions when renting, but the costs will likely be substantially less overall. So to save money along the way, renting tends to be the way to go.
“Not so fast”, you say! When buying a house, you build equity – you’re just throwing away your money when renting.
I can offer you a big fat “that depends” with that statement.
When buying a house, the assumption is going to be that your house will appreciate over time and that’s when the good money shows up. Most of the time, that’s going to be the case. However, three exceptions come to mind where that wouldn’t hold true:
- Your house actually depreciates because you bought in a location that’s going downhill.
- You decide to sell during a major housing market downturn.
- You move without holding onto the property long enough to make up for closing costs and real estate commissions (generally known as the 5 Year Rule).
If you fall under any of these exceptions, that equity you’re counting on could be a fantasy. Otherwise, it’s tough to pinpoint an exact number because of so many variables, but nationwide, the average appreciation lately has been around 3.5 to 3.8%. Of course, the housing market spike we’ve had over the past couple of years has led to some insane increases that throw those numbers completely out of whack.
Regardless, owning a house will usually mean that you’ll end up owning something worth a good amount of money down the line.
But what if the renter is diligent with the money he saves by deciding to rent vs buy and socks it away? Would that change anything?
Robert Farrington from The College Investor site did a nice breakdown in his article “Buy A House vs. Rent An Apartment.” In it, he uses an example of a 3-bedroom, 2-bathroom house located in a higher cost of living area. The house was purchased for $510,000. and sold 6 years later for $672,500.
I’ll let you read the article, but the gist is that renting that same place for $2,400/month over that same period would have yielded different results. If the renter had invested the $6,163 savings per year at a 9.5% average annual return, he/she would then end up with $48,966 at the end of the 6 years.
That’s a lot less than the homeowner would have brought in but still a nice stash. There are two important points to factor into this though:
1) That’s the case if and only if the renter was investing the difference every month, which is something that most renters aren’t going to do. Homeownership is almost a forced savings where renting requires more diligence – something that most people aren’t great with.
2) I’d guess that many folks, in this example, would likely opt to rent a less expensive place or would be buying (if they could) at that price per month. That provides the potential for savings and ROI much closer to what the homeowner would get.
Essentially, it’s not so cut and dry to say that renting is just throwing your money away. Depending on how conscientious a person is, the further ahead they can be. The potential for building wealth can still be had with renting.
On the other hand, when you own a home and you’re done paying for it, it’s yours… sort of. If you stop paying your property taxes on it, you’ll find out real fast who truly owns it! A homeowner can eventually be mortgage-free whereas a renter will always need to keep making payments. That can make home-owning something truly liberating!
It’s also important to remember that rents go up over time. If you have a fixed mortgage, you don’t have that problem, which can make your payments seem smaller as time goes on and inflation does its thing. Rest assured though, property taxes will continue to grow over time for homeowners!
The non-financial side of the equation
Renting will usually be less stressful because you tend to have fewer unexpected costs than a homeowner has. And when something breaks, you don’t need to worry too much about how to fix it. You make a phone call and call it a day.
That said, what’s the turnaround going to be for the repair? Will it be replaced or fixed in a way that makes sense to you? Did they cheap out and make things more difficult or less appealing to you? You just don’t know. Unfortunately, that’s mostly out of your control.
Speaking of repairs, those can be a real headache for homeowners. Not simply because of the costs involved, but you also need to put in the legwork to make things happen. You either need to contact the right people to get it fixed or do it yourself, the latter of which cuts into your time more than your pocketbook. Either way, it’s not fun (unless you’re one of those people who love this sort of thing).
However, when you own a place, it’s yours. You have control to be able to make changes or improvements to it without a fuss (assuming you’re following zoning laws and any HOA rules). For a lot of folks, this is huge. Many people want to make the changes they want and there’s nothing wrong with that… but that’s something you can’t easily do when you’re renting.
Some might argue that when you’re renting, you can’t entertain friends and family as easily. That’s not necessarily true though because if you’re renting a house, you’re in the same position as you would be when owning. It’s going to be a little more difficult in a smaller apartment but complexes usually have some type of community room you can use if you want to bring a bunch of guests over.
Another possible flawed argument would be to compare the space you get when you rent vs buy because this can be controlled in either choice. If you want more space when renting, an apartment wouldn’t be the best choice – find a nice house for rent. If you want less space when owning a home, buy something smaller.
A big difference between a rent vs buy situation though can be found in the ability to pick up and go. When you’re renting, you tend to have more freedom to move around if needed. If you’re not happy, you move once your lease is up. If you’re really not happy, you can break the lease and pay the penalty if needed – though breaking a lease isn’t usually something I’d recommend.
If you own a home, that freedom can be a little harder to come by since you’re at the mercy of what kind of housing market you’re in. In a seller’s market, you’ll be loving life and can probably turn it around pretty quickly. But in a buyer’s market, you could find yourself hopelessly trying to sell your place for months or even years and needing to take a big haircut on the price to sell it.
Regardless of the type of real estate market going on, it’s still a pain to sell a house. Assuming you’re aiming for the most money you can get, you need to get everything fixed up or painted beforehand. Then you need to have everything in pristine order because there could be a showing at any time. And, of course, that means strangers traipsing through your house while you’re not there.
What can you do to even things up?
Here’s the deal, the rent vs buy decision doesn’t completely lock you into the fate of “spend less but live in a tiny apartment” or “own a giant house that costs too much.” You have the power to find what works for you.
If you like the flexibility of renting but want more space internally or from neighbors, an apartment isn’t your only choice. Renting a house might be more to your liking.
And if you prefer owning your home, does that mean you’re doomed to spend too much money over the long haul? Not at all. Although banks and real estate agents would prefer you to spend more than you should, that doesn’t mean you need to do that. Find a smaller house or change neighborhoods to get the price range where you’re comfortable. And don’t forget to consider property taxes in the area as well.
If you choose to rent instead of owning but “throwing away” your money is getting you down, plan accordingly. Generally, when renting, you’ll be paying considerably less money each month than a homeowner. So figure out what you would be spending on a house and sock that difference away each month. By properly investing that money, you’ll now be building up your own equity for the future.
In other words, you’ll still need to choose whether to rent vs buy. However, you have the ability to make either decision the best choice for you regardless.
Where do we stand on the rent vs buy conversation?
As you can see, contemplating the rent vs buy decision isn’t so simple. There are a lot of factors to consider with pros and cons for each.
We sold our home in 2018 before moving to Panama. It was a beautiful house in the suburbs and we had some great neighbors. We loved our time there and it was what many think of as part of the American dream.
But I’m done with that. The headaches from repairs and maintenance. Having a house that was too big for us with so much stuff. The pain in the butt of getting ready to sell it.
Selling our house along with all our stuff before moving to Panama unexpectedly turned out to be the most liberating thing I’d ever done. This was a freedom I never realized I wanted.
A few years later and I can honestly say that for now, I have no desire to own a home again. In fact, I don’t necessarily even care to rent a house. Even with some of the downsides of apartment living (like people living above you), I’d take that any day.
Having a limited amount of space makes it harder to buy things you don’t need. And the freedom to easily be able to just finish a lease and move on to another building, city, state, or even another country without the home headaches outweighs the cons to me.
Remember though… I’m only one part of this relationship with what probably constitutes 49% of the vote. 🙂 Lisa has enjoyed this newfound freedom we’ve had as well, but she dislikes apartment living more than I do. So time will tell what we end up doing down the line.
I think in the rent vs buy discussion, we’ll likely be renters for the time being. But whether we rent an apartment or house might be more of a topic of discussion at some point in the future.
The beautiful part about deciding on whether to rent vs buy is that there’s room enough for both decisions (though the housing shortage has made things a little messier). Just because I prefer renting doesn’t mean it’s better or worse than a decision to buy.
Considering the good and bad of each, it’s up to you to determine the right financial and emotional factors that add up to the right choice for you.
What do you think? Am I out of touch on the rent vs buy discussion? What other points would you argue on either side?
Plan well, take action, and live your best life!
Thanks for reading!!