Should You Rent or Buy?
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Have you ever heard the advice that renting is like putting your money in a trash can and lighting it on fire? You don’t have to look far to find financial gurus telling you that renting is a waste of your money. This has become such common advice that all the self-proclaimed finance experts in your life (like your father-in-law or uncle) are likely loudly touting the advantages of owning—claiming that buying a home is an investment.
The problem is that buying a home may or may not actually be the smartest decision. It’s certainly not a decision that should be taken lightly under the assumption that it is always the best option.
When deciding to rent vs. buy, it’s important to consider what is actually the best decision financially (based on pure numbers) in addition to what effect it has on your life.
Take Sarah (name changed), who recently asked in a Facebook group about renting versus buying a condo. She is a young professional who is going to be moving in with her boyfriend. He wants to buy a condo (pressured by his father), but she is unsure if it is a good idea because she doesn’t know for sure if she will stay in that city or what she’ll want to be doing in a year or two. Even though she can definitely see a future with her boyfriend, she worries about committing to a condo when she’s not sure what her future looks like
Should she continue to rent or would it be better to buy?
Obviously this is a specific situation, but it illustrates the two primary considerations when it comes to renting or buying:
What makes sense from a financial perspective?
What is the best choice for her life?
Renting vs Buying: The Financials
The first thing you’ll want to do if you’re deciding between renting and buying is to use an online calculator to get an idea of the financial implications.
For example, you can use this calculator from NerdWallet to evaluate the costs. You’ll enter some information about your location, the cost of a loan, and the cost of rent. The calculator will compare the monthly costs and show you how long you’d need to own the home in order to break even.
Generally speaking, renting ends up being cheaper when you don’t stay in the home for very long. If you only live in a home for a year or two, it is usually cheaper to rent. This of course depends on many factors, including cost, mortgage rates, housing markets, etc. But using a calculator like this can give you a basic idea of whether buying is something you should consider.
You also might be thinking that you could rent out the condo or house if you decide not to live there anymore. In fact, having a rental property can be financially beneficial. But it’s not for everyone. If that’s something you’d like to do, make sure you understand the rental market and make a plan for managing it and dealing with repairs.
Buying a house, condo, or even a rental property is a major financial decision. It is important to fully understand both the context and ramifications of everything from taxes, to insurance, to the overall real estate market. If you are serious about wanting to buy, talk to realtors and a financial planner who can help you think through the possibilities and make the best decision for you.
Homes are not investments.
You should not buy a home because you expect financial benefit from future appreciation. Homes come with added expenses. Things break. Roofs need replacing. Lawns need mowing, snow needs to be shoveled, and trees need to be trimmed. Next thing you know you have water backed up in your sink when you have guests over and it’s a weekend evening so you have to call the expensive emergency drain service.
Trust me when I say home ownership is expensive and you can never count on coming out ahead, especially when you don’t know what the market will do. Thousands of homeowners found themselves owing more than their house was worth in 2008.
Besides, a home is not a liquid asset. Think of all the older couples who are house rich and cash poor. They have a home they love and can’t bear to part with, but they need extra money to pay for their living expenses. A home isn’t an investment that always works out to your benefit.
Renting vs Buying: Your Life
When it comes to renting vs. buying a house or condo, there is no one right answer for everyone. Even if you decide that one makes more financial sense, it might not be the right answer for your life. Not everyone needs (or wants) to own a home. And that’s okay, because life isn’t just a set of numbers.
In the case of Sarah, there are two major problems with her buying a condo. First, it sounds like she doesn’t really want to. That alone is a good enough reason to rent. She isn’t confident that she wants to stay there and isn’t ready to be tied to such a huge financial commitment.
Second, she has the relationship component to consider. Moving in with someone new for the first time is a big adjustment to make even without the burden of joint home ownership. While buying a condo together certainly is an option, it doesn’t seem like the best decision for her at this time. I’ve read way too many personal stories where co-ownership has ended badly when a relationship fell apart. (This doesn’t mean they can’t live together, just that they might not want to own a condo together.)
The point is that renting vs. buying is far more than a financial decision. At a certain point, if you’re making all of your decisions purely on the financial benefit, you’re missing out on a lot of life. What’s the point of life if you make it only about money?
So if you are trying to decide between renting and buying, I encourage you to do your research and think about the bigger picture of how this decision fits into your life and your goals.
