Buying a House vs. Renting: What’s the Right Call?

 

For some reason, home buying and mortgage stories have been a poplar topic on personal finance blogs this week. That is great for me because I love reading and talking about real estate. I LOVE it. I love buying it. I love owning it. I love renting it out to other people. Here’s a big WOOT! for real estate!

Of particular interest to me this week is the first ever “Smart Money Debate” at Ready For Zero. It features our friends Michelle from Making Sense of Cents and Carrie from Careful Cents. The debate asks the question, which is better – buying a house or renting? Michelle argues why you should buy a home while Carrie provides her views about why she prefers renting. I actually think that they are both right. Here is why.

 

 

Why Buying a House is Better

Buying a House vs. Renting

Let me begin by saying this: I believe that in almost all circumstances buying a house is a better financial move for you than renting is. Why you ask?

1) You are building equity

Here is the biggest and most persuasive argument. While rent payments help to fund equity in somebody else’s property, mortgage payments build equity in your own house. Quick translation: you are using your money to build your net worth rather than your landlord’s.  Sure, you have to fix things from time to time. Occasionally, you have to make major repairs, like putting on a new roof.  However, you can always find San diego property management companies and other large city property management companies to take care of that for you. However, the thousands of dollars a year that you spend in rent is paying for somebody else’s roof.  At the end of the year, while I may have paid slightly more in mortgage payments than you did in rent, at least I am slowly becoming the true owner of my property. On the other hand, as a renter, your money has been used to buy ownership in absolutely nothing.

2) Real estate is a tangible asset

Look, I love money. I love it in all of its forms. I have money in the bank. I have money in the stock market. Sometimes, Holly even lets me carry money in my wallet. Still, all of that money is simply paper. It is a promise of value. If the dollar was to collapse, if the stock market was to implode, if the economy went completely ”belly-up” tomorrow, much of that money would be gone. It would be lost. The only reason that it has value is because of the promise that backs it up.

On the other hand, real estate is a tangible asset. It is something that you can feel, something you can touch. That is why it is called “real” estate. Land and houses will always have some value because they are able to be lived on or in. There are very few things that we are unable to make more of, and land is one of those things. Because of that, it has true value. Regardless of what happens to my paper money, I find comfort in knowing that I will still have a house to live in.

3) The house is YOURS

This is kind of a hokey reason, but owning your own house just makes you feel like more of a grown-up – at least it does for me. It breeds a certain kind of personal responsibility.  You are now in charge of the property in which you live. It is up to you to take care of it. Nobody is going to come and cut your lawn, trim your trees, or bail you out of problems. It is up to you and nobody else.

Besides, do you still want to be renting when you enter retirement? What happens when your landlord raises the rent when you are 65? Do you move? Do you go back to work? Do you beg your kids for help? No thank you. I’ll stick to home ownership.

 

Why Renting May Be the Better Choice For You

Buying a House vs. Renting

While owning a house is clearly my preferred choice, I wouldn’t recommend it to everybody. Here are some reasons that renting may be a better option for you.

1) You can’t afford to buy a house

This should be a pretty obvious one, right? Simply put, if you can’t afford to pay a mortgage on a house that you’d like to buy, you shouldn’t do it. Living in the Midwest, this is something that I don’t think about too much.  However, if you live in a city like San Francisco or New York, buying a house can be a tall mountain to climb for a lot of people.  In my opinion, your mortgage payment shouldn’t be more than 25-40% of your take home income. If it is more, you are probably going to be living too close to the edge of your means for my taste.

While not being able to afford the mortgage is a fairly obvious reason to rent, there are other expenses attached to home ownership that may not be quite as obvious.  For instance, being a homeowner means that you have to pay property taxes.  As I mentioned above, you also have to have money to make repairs.  Furthermore, you need to be careful not to make yourself house poor. While this includes not spending too much on your actual mortgage payment, it also means not buying such a huge house that you can’t afford the utilities – among other things.

2) You are a “House Hopper”

Maybe you are young and transient – not knowing where you want to settle down. Maybe you aren’t young, but you just like to move into “bigger and better” houses when your income allows. Either way, you could probably consider yourself a “house hopper.” If that is the case, renting may be a much better deal for you – especially if you are buying houses using 30-year mortgages.  Why?

When you purchase a house using a mortgage, the interest you pay is loaded heavily toward the front of the loan. The further you are along in the repayment process, the less you will owe each month in interest. Therefore, if you do not stay in the house for an extended period of time, you will have built very little equity.  Essentially, you have just “rented” the house you “own” from the bank.

Furthermore, when you hop to your “bigger, better” home, choosing to replace your 30-year mortgage with another 30-year mortgage is a risky proposition. In theory, real estate should increase in value. However, if the value of your house a) increases very little, b) holds its value but does not increase, or c) decreases in value, you could be in for a rude awakening. When it is time to sell your home so that you can hop to the next one, you will now have to pay the difference between the sales price and the balance owed on the loan to the bank. Furthermore, you will also have to pay for your closing costs.  So now, not only do you have zero equity in a house, you may also be out thousands – even tens of thousands – of dollars. You would have been better off renting.

3) You will soon be able to pay cash for a house

Cash you say? Nobody pays cash for a house.  Well, despite rumors to the contrary, it is possible.  If you are debt free and saving money like a rock star, you can truly buy a house with cash. You may have to sacrifice by living in your apartment for an extra couple of years, but think about how awesome it would be to own your house free and clear from day one! Think of all the money you could save each month if you didn’t have a mortgage or rent payment. Now THAT is some financial freedom!

You still don’t believe that it can be done? Check out this article by our friends at Well Kept Wallet.  They show you how you too can buy a house without a mortgage.

 

As you can see, while I believe that owning a house is clearly the best option for most people, it is not always the right choice for you. Whether you should rent or own largely depends on the facts of your personal situation. Hopefully, these tips have helped point you in the direction that may be best for you.

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About Greg

Greg Johnson is a proud husband, father, and debt crusader who is in the process of becoming debt free. He is the co-founder of the personal finance website Club Thrifty, where he brings the awesome sauce each and every day.

Comments

  1. Great post! I talked about this on my blog yesterday in my Fact or Myth series. I always just assumed buying was the best option. But sometimes, it makes more financial sense to rent while you get your finances in order.

    • Yeah, I used to be the same way. I thought the only way to go was to buy – even though I used to be a renter when I was younger. However, I’ve come around lately. I really can see how renting is a better option for some people now.

  2. I’m definitely in the house hopper category, but I bought a 3 bed flat in the UK and lived there for just under a year, it gave me time to know my roommates and I left my room rented too, so now I can travel the world and use that room’s rent as my rent money. And one UK room = a nice fully furnished colonial house in Guatemala :) Best of both worlds!

    • Sweet! Great job Pauline! We had a 30-year mortgage on our first house and decided to rent it out when we hopped to our new home as well. It actually worked out great for us, but it probably wouldn’t have if we hadn’t decided to be landlords.

      Let us know when we can come and visit you in Guatemala;)

  3. Good point on the front loaded mortgage interest, I never thought about it like that. Another thing to add to the house hopper is commissions. They take a huge bite out of your sale price, unless you’re fortunate enough to pull off a for sale by owner deal.

    • That is absolutely true. I thought about adding that in there, but in my mind I lulmped that in with closing costs. But yes, commissions are huge. Typically, it they are about 3.5% for each sides realtors. This is almost always covered from the seller’s “profits.”

  4. I’ve always assumed buying a home was the best option too. Now I realize that in my case it probably is better to keep renting for now. In my situation too much is uncertain and I live in a very expensive market. So it could be a big mistake to commit to a 25 year mortgage that I might not have the long term income stability to afford. Still it sucks knowing that my rent payments are not building any equity.

    • Honestly, when I was renting, I was too young and dumb to know any better. I wasn’t even thinking about building equity. You are way ahead of where I was at that point, so I think you are going to be just fine:) It still sucks when you realize that though, doesn’t it?

    • You may not be building equity but consider how much interest would be lost to the bank if you can’t put down a serious amount in a high cost of living area, plus what you could make on other markets should you invest the difference between your rent and the mortgage payment you don’t have.

  5. Renting works if you’re disciplined enough to save the difference. Where buying works for many people is it compels them to do what they wouldn’t do otherwise: save. I know, how can you call it saving when you pay the bank hundreds of thousands of dollars in interest? Here’s how: the interest you pay them is less than what you fritter away in the bar and on future yard sale stuffers.

    Here’s one of the most important keys, though: WHEN you buy is as important as whether you buy. The 25% of all homeowners whose mortgages surpass their house values will attest to that – they bought at the wrong time.

    House prices are cyclical. That means they go and down. Buying low is great, buying high is “don’t even think about it.” Unfortunately, that’s when the easy money is and people get seduced by that.

    So, while you’re waiting for the economic cycle to deliver you an affordable house, renting is a great option.

    • “House prices are cyclical. That means they go and down.” Freudian slip? Very appropriate that up was missing, made me chuckle.

      • K – that is funny! I almost missed that:)

        William, I totally agree. When you buy is very important, especially in areas where the market fluctuates wildly. Luckily, where I live, home prices are relatively stable. Thus, when the market crashed, we didn’t lose a lot of equity. On the other hand, when the market rebounds, we won’t make a killing off of our homes either.

      • I literally burst out laughing when I read that! Great catch! You’re right (of course).

  6. Great resource here Greg, and I really like the way you summed up the pros and cons! I used to be one of those people that was very pro buying a house, but then I realized it wasn’t the best option for me personally – even if it was financially smarter. Just because I could build equity or customize my own home, doesn’t mean I shouldn’t consider other possibilities, like the ones you mention here. Everyone should take your advice and determine what is best for them! Great post. and thanks for mentioning our debate :)

    • Thanks for visiting Carrie! My views have evolved on this issue as well. When I was younger, I didn’t think much about it. Since I’ve become a homeowner, I’ve been very pro home ownership. Recently, I’ve begun to see both sides of the issue. As is so often the case, the best option probably lies somewhere between the two extremes.

  7. Nice comparison. I like William’s point above about forced saving when buying. The bad news is that a house you live in isn’t a great “asset” when you factor in carrying costs. Who wants to be forced to sell their house to realize dreams just because they weren’t disciplined enough to save?

    • I didn’t mention this on William’s comment, but -while I agree that it is forced saving – it is only saving if your house appreciates in value. If it doesn’t, then you are actually losing money.

      “The bad news is that a house you live in isn’t a great “asset” when you factor in carrying costs”

      Joe, have you been reading Rich Dad, Poor Dad? :) In that book, the author suggests that his home is not an asset. Rather it is a liability because it is costing him money rather than putting money in his pocket.

      Thanks for the comment!

  8. Great article, Greg! We’re not in the financial position yet to own rental real estate, but I can’t wait for the day that we are!

    I’d agree that in most cases buying is better than renting, but as you outlined, renting is a great fit for many people. Most people fall into the traps I mentioned on my guest post and forget all of the EXTRA charges that are in addition to the mortgage payment. It’s so sad to see houses in wonderful neighborhoods that just haven’t been maintained, and the primary reason for that is the owners just didn’t have enough money to truly afford the house (and the repairs/upkeep they require).

    I’d say building equity and being a home-owner are the most important aspects to me. It’s nice knowing that this is our home.

    • Thanks Jason!

      I really loved your guest post at Modest Money. You did a great job of outlining all of those traps. For those of you who haven’t read it yet, make sure to click the link in my article and head over there to read it.

      As you say, it is unfortunate to see those unmaintained houses. Actually, the house next door to ours was just foreclosed on and was a bit run down. We thought about buying it, but the price didn’t reflect the work that needed to be done. Still, that drives down the value of all of the homes in our neighborhood. Ugh.

  9. If you are transient, say you might move every 3 years, you could still consider buying a home/condo/townhome with idea in mind you will rent it. It could be a good way to start a physical real estate porfolio. Of course, I’m assuming you have the funds to do this.

    Otherwise, renting is better.

    • I couldn’t agree with you more. In fact, while it is somewhat risky, this is a great way to do it. In fact, that is what we did with our first house. As a bonus, if you plan to carry a mortgage on it, you will get a much better interest rate if you purchase a property as a primary residence first. Rates for investment property are generally a point or more higher.

  10. Great post Greg! I too have found my opinion change over the years as I’ve gotten older. I do remember always hating making out that rent check each month as I just felt like I was throwing money out the window. With the rates the way they are today it makes so much more sense to buy, IF it makes sense for your budget.

    • With the rates being as low as they are, it really is tempting to buy. At some point, I would think that they do have to go up:) The banks aren’t going to pay us to take out a mortgage…at least I don’t think they will.

  11. I agree that there are some people that would benefit from renting over buying, and we have a good friend who is a mortgage consultant who believes that buying a house is a horrible idea….for anyone who can’t afford to pay with cash! However, I’ve rented and now am living in a house we bought (well, the bank bought and we’re slowly paying them back!) and I can honestly say that I love having my own space. I feel like I can paint the walls, have a garden, buy a dog, whatever I want. While in an apartment, we weren’t allowed to make the space our own…and therefore, for me, it never felt like home. I also love having my own yard where my kids can run around and not have to share with others. Yes, we often go to the park and the pool where they have to “share,” but it’s nice to have our own space to do as we please. Sorry for not really touching on the financial aspect of it. For me, it’s not even about that. For me, it’s all about the comfort and freedom.

    • I totally agree!

      I love to paint and decorate so renting wouldn’t quite work for me. When we bought our current home, we knocked down a wall and made two living areas into a giant great room. We couldn’t have done that if we were renting!!!

  12. Great post, lots of information. I believe there were pros and cons to both for us. When we rented we were able to save alot of money. We didn’t have any home maintenance fees and life seemed pretty simple to be honest. The negatives were that we were bored with living in an apartment box and wanted some responsibility in our lives. We knew that would come at a cost and would suck up some of that downtime that we had so much of. Was it worth it? You bet and I’d do it all over again! I’m happy we rented to save a down-payment and had the luxury of downtime and happy we were able to move on. Cheers Mr.CBB

    • Yup, I totally agree.
      We actually lived in a free apartment for the first year we were married. We saved a TON of money but it was boring living in such a small space with no freedom to make it our own.

      I prefer owning, but I can see why other people rent depending on their situation.

      Have a great day!

  13. Purchasing a home is one of the largest financial investments many people will ever make in their lives. There are a few major risks of buying/owning a home that must be considered before making such a major decision.
    Kevin Grand recently posted..Stribling State of the Market November 2012My Profile

  14. I know at least for me I’m still in the renting phase of life – it’s simply too much to buy a home at the moment!

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  13. [...] Ideally, a landlord wants to make money when they buy, own, and then sell the home. Therefore, buying a rental house with cash is optimal. In our case, however, we weren’t able to do that. We used a mortgage. Although we aren’t generating income on them right now, I’ve found that the properties were a great investment because the renters are paying off our mortgage. This is one of the many reasons I almost exclusively recommend buying a house over renting. [...]

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  15. [...] costs to home ownership can be the maintenance costs that occur after your purchase. When you are renting, your landlord will simply fix and problems that you run across, but when you own the property, [...]

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