Should you rent or buy a house is one of the most complex questions to answer in the world of personal finance. It’s a hard question because there are so many moving parts and its truly a decision that is different for everyone.
In this post, I answer this question by diving deeper into both the behavior side of owning or renting a house as well as the mathematical side.
- Should You Rent Or Buy A House: Stress & Anxiety #1
- Should You Rent Or Buy A House: Stress & Anxiety #2
- Should You Rent or Buy A House: Financial Risk
- Should you Rent or Buy A House: It’s Cheaper To Rent
- Should You Rent or Buy A House: Owning Is A Good Investment
Should You Rent Or Buy A House: Stress & Anxiety #1
Buying a house is “the American dream.” I completely understand why this term has been coined. Its awesome to have the freedom to “own.”
Often times, we dream of what our perfect home is going to look like. From the size of it all the way down to what pets are going to be running around the backyard.
What we don’t plan for is the stress of home ownership which primarily comes from taking care of it. Every time something goes wrong, you are in charge of it.
For example, let’s say you wake up at six every morning to go to work. Tonight is a late night because you had to stay late at work today and it is now midnight. You go to the bathroom and the pipe is broken.
You have to take care of it. That means staying up later trying to figure out what is wrong, figuring out what you are going to do in the morning, then trying to find a plumber all the next day while you are at work, and then once you have a plumber when can you meet them at your house.
Renting instead of owning easily takes the cake on this one. When something goes wrong, you simply call the landlord or the property manager and they are responsible for getting it fixed.
Rent vs buying a house pros and cons: This is a pro for renting.
Should You Rent Or Buy A House: Stress & Anxiety #2
The next stressor of owning a house comes at the risk of being “tied down.”
Let’s say you got a new job in a different state, if you are renting, its very easy to move. In short, you can go after opportunities when they present themselves let that be a job or just the opportunity to take advantage of cheaper rent.
For example, at one point in my life, I moved six times in 5 years. Three times I moved because my employer asked me to and was willing to pay me more money to move. Twice was to take advantage of job offers in other cities which I was able to take advantage of.
The ability to move has really come into focus during COVID. This is the case because people are able to work remotely. Therefore, we’ve seen an exodus from big expensive cities to lower cost areas.
When you rent you have the mobility to do this. When you own you are “tied down.” Yes, you could sale your home but that takes time and it can be a lot more costly. In addition, it might not be the optimal time to sale your home.
I see it all the time, someone buys a house then a year later there is an opportunity for them to move but they don’t take it simply because they just bought a house.
Rent vs buying a house pros and cons: This is a pro for renting.
Should You Rent or Buy A House: Financial Risk
Financial risk is extremely hard to gauge. Most people refer to financial risk to owning a house as one of two types of risk:
- Your required monthly payment on your mortgage as well as property tax
- The risk that your home is going to go down in value.
I’ll tackle both of those risks and then share with you the “real” risk that I think is more important.
Finance professionals will say home ownership is more financial risk because they are looking at your budget. Most of the time your monthly payment is higher for a house than rent. However, probability says that you will be able to maintain your mortgage payments. If you couldn’t, then you shouldn’t have gotten the loan in the first place.
Therefore, yes a mortgage adds financial risk to your profile (for those of you that are FitBUX Members you’ll see your FitBUX Score decrease when adding a mortgage). However, you have to ask yourself how likely is this risk and is the return worth it (more on return below).
The second risk is that your home goes down in value. Yes this is correct. However, we aren’t referring to an investment house that you are looking to flip in a few years. Most of own homes (I’m not referring to condos, only homes) for the long-term. Therefore, as long as I’m making my mortgage payment, I’m playing the long game and this shouldn’t matter.
This leads to what I refer to the real risk or the tail risk of renting a house vs owning and is something that most people don’t think of. I mentioned above multiple times “as long as you are able to maintain your mortgage payment.”
The financial risk in owning vs renting comes when you face financial catastrophe. This catastrophe can be unemployment or an unexpected medical event. In these cases, people say to limit the risk with an emergency fund but that might not be enough… I’ll explain below with an example.
If you are renting, in order to maintain your rent, you have to begin using your emergency fund. At some point you’ll hit zero and can’t afford rent. In many states, the eviction process is very quick. I.e. you’ll be out of the house fast and now you have to find a place to move to as well as potentially store your belongings.
Contrast that with owning a house (and this is counter intuitive). You wouldn’t have to use your emergency fund for the mortgage… What??? You may be saying. The foreclosure process for a home is long relative to the eviction process if you’re renting. It can easily take 6 – 9 months to go through foreclosure.
Therefore, you can stop paying your mortgage and use your emergency fund for day to day expenses like food. Yes, you may get behind on the mortgage but you’ve bought yourself time and have “stretched out” how long your current funds will last you.
In another case, you could have equity in your house. At that point you should have a line of credit you can draw on in case of an emergency.
For these reasons, in this worst case scenario, owning a house actually has less financial risk than renting.
Rent vs buying a house pros and cons: This is a pro for renting
Should you Rent or Buy A House: It’s Cheaper To Rent
Note before we begin: this will be different for everyone because costs are different in various locations.
You have to look at this statement in two different time periods: Today and Tomorrow.
Today: It is a general belief renting is cheaper on a month-to-month basis and yes this generally holds true. Where I see people make a mistake is when they simply look at their monthly rent vs a mortgage payment. You shouldn’t compare rent to the mortgage payment. It should be compared to home ownership expenses which includes the mortgage, insurance, taxes, and housing upkeep.
Tomorrow: When you finish paying off your mortgage you have no more expense… this is not entirely true. The way I personally look at it is you are renting when you own a house… Let’s think about this deeper…
When you own a house you have to pay property taxes. If you don’t, the government will kick you out of your house. When you rent you have to pay the monthly rent, if you don’t the landlord will kick you out of the house. In short, using this line of thinking, the government is your landlord when you own.
Therefore, depending on where you live,.0 property tax can be a massive expense in retirement. I’ve personally meet some retirees who had to move because their property tax bills increased to a point it wasn’t affordable. Add this to home insurance and home upkeep expenses and owning a house even after the mortgage is paid off can be very expensive.
Rent vs buying a house pros and cons: This is a pro for renting.
Should You Rent or Buy A House: Owning Is A Good Investment
If you listen to the “older” generation, housing is the best investment in the world. Its because they bought their house for 60k fifty years ago and today its worth 600k. However, most of the time when you factor in the cost of the mortgage, the property tax, home upkeep expenses, insurance, etc… the return on investment of your primary home isn’t that good.
In fact, many financial professionals say home equity is the worst asset because it’s a dead asset. They use that argument to say why home ownership is a bad idea. I’m going to explain why these professionals in my opinion are wrong. However, I’m first going to share with you two goals for housing that I believe everyone should have.
Housing Goal #1
If you are going to purchase a house, your top goal is to pay off the mortgage (and all your debt for that matter) before hitting retirement. I can’t begin to tell you how many people I’ve seen enter retirement still having to pay a mortgage. In the short-run, most will realize they shouldn’t have retired and have to go back to work. Therefore, if you own a house pay it off or retirement will be stressful.
Housing Goal #2
If you are going to rent then this is what you want to try and do. Estimate what the total housing costs would be if you did buy. Subtract your rent from that and invest the difference. For example, if your total housing cost to buy was $3,000 a month and your rent is $1,400 a month, then you’d want to invest $1,600 a month. Your goal is to have enough in assets saved in retirement whereby your assets are generating enough income to pay for your rent. (See our article coming soon titled: Is Renting A Waste Of Money for more details)
Ultimately, you are trying to have your primary housing cost, your mortgage or your rent, taken care of by the time you hit retirement.
Many will look at this and say Housing Goal #2 gives you a lot more money in the long-run plus all the benefits of renting. Then they’ll ask why wouldn’t everyone do that? The answer is behavior.
The number one thing that separates FitBUX from other financial companies is our inclusion of human capital into our technology. Human capital includes the analysis of behaviors to help determine outcomes. Therefore, we analyze a lot of behavior…
In short, most people don’t have the behavior to do Housing Goal #2. They rent and instead of investing the money they “blow it.” Therefore, owning a house and paying off the mortgage is an easy way of maintaining discipline while building an asset.
For that reason, I give this one to owning a house over renting. However, if you have the discipline to invest, this could easily go as a pro to renting.
Rent vs buying a house pros and cons: This is a pro for owning.
