Buy Or Rent?
Should you buy a home or rent. This is not always an easy question to answer, and the wrong answer can
cost thousands. Here are some factors to consider.
buy rent, buying versus renting, real estate
Should you buy or rent? It depends on your circumstances, and the real estate market where you are going to
live. Years ago, I sold a home for a young couple who owed almost as much as the sales price on their
house. They needed to take money from savings to pay the closing costs and sales commission. You can bet
that they wished they had rented for the couple years they lived there.
This brings up the first thing to consider when comparing buying versus renting: the amount of time you'll
be there. Buying and later selling a home will usually cost about 10% or more of the value of the home.
These costs mean that if the home only went up in value 10% or so in the year or two you lived there, you
won't be gaining anything (equity gain from principal pay-down is very little in the first years). You'll often
be better off renting if you'll be in a town for less than a few years.
What about towns with faster rates of appreciation? Have you done some serious homework? If not, to
assume appreciation will be more than the rate of inflation is just gambling. The sellers in the example
above sold for the same price they bought the house for two years earlier - and this was in a decent and
growing area. You can't count on fast appreciation just because it has been that way recently.
<b>To Buy Or Rent - Cost Comparison</b>
Looking at buying versus renting, you have to take into account that in many places it cost much more to
buy. In Tucson, Arizona, for example, a small home can cost $200,000. The mortgage payment, taxes,
insurance and maintenance will add up to about $1,600 per month, but you can rent the same size home for
What does that mean? Many real estate fanatics will say you're at least buying something for your money,
and renting is throwing your money away. Of course in this example more than $1,000 of your payment will
be going towards interest alone, and that's not buying you anything.
Suppose you can afford the $1600 per month, but instead you rent for $800 and put the other $800 into a
decent safe investment that makes you 5%? In three years you'll have over $30,000 in this account. If the
home appreciated at 6% per year (it has been more like 25% per year recently, but that can't continue, and
assuming so is not planning, but gambling), it would be worth $231,000. The costs of initially buying it and
then selling it would be around $13,800 (2% buying and 6% selling), leaving you with a gain of about
19,000 once we include your principal pay-down.
In other words, you would be at least $11,000 better off if you rented and banked the difference. Every
market is different, of course, so you have to do the math. Compare the total costs of owning versus renting,
and then make safe assumptions about the rate of appreciation for homes.
If you'll definitely be in one place for a long time to come, it will almost always be better to buy than to rent.
In the last example, buying becomes a better bet after about four or five years. Also consider that if you get a
fixed rate mortgage, your payment will never change, a benefit landlords won't offer you that on your rent
To sum up, look at the time you'll be there, the comparison of total monthly costs, whether rents are going
up fast, and whether you have good reason to believe home prices will be going up fast. Then look also at all
the personal factors. Do you want to be responsible for the maintenance, yard work and unpredictability of
To buy or to rent? In the end, you have to work this one out by yourself.
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