Should you rent or buy a house is one of the most complex questions to answer in the world of personal finance. It\u2019s a hard question because there are so many moving parts and its truly a decision that is different for everyone.<\/p>\n
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.<\/p>\n
<\/a><\/p>\n Buying a house is \u201cthe American dream.\u201d\u00a0 I completely understand why this term has been coined.\u00a0 Its awesome to have the freedom to \u201cown.\u201d<\/p>\n Often times, we dream of what our perfect home is going to look like.\u00a0 From the size of it all the way down to what pets are going to be running around the backyard.<\/p>\n What we don\u2019t plan for is the stress of home ownership which primarily comes from taking care of it.\u00a0 Every time something goes wrong, you are in charge of it.<\/p>\n For example, let\u2019s say you wake up at six every morning to go to work.\u00a0 Tonight is a late night because you had to stay late at work today and it is now midnight.\u00a0 You go to the bathroom and the pipe is broken.<\/p>\n You have to take care of it.\u00a0 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.<\/p>\n Renting instead of owning easily takes the cake on this one.\u00a0 When something goes wrong, you simply call the landlord or the property manager and they are responsible for getting it fixed.<\/p>\n Rent vs buying a house pros and cons: This is a pro for renting.<\/strong><\/p>\n <\/a><\/p>\n The next stressor of owning a house comes at the risk of being \u201ctied down.\u201d<\/p>\n Let\u2019s say you got a new job in a different state, if you are renting, its very easy to move.\u00a0 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.<\/p>\n For example, at one point in my life, I moved six times in 5 years.\u00a0 Three times I moved because my employer asked me to and was willing to pay me more money to move.\u00a0 Twice was to take advantage of job offers in other cities which I was able to take advantage of.<\/p>\n The ability to move has really come into focus during COVID.\u00a0 This is the case because people are able to work remotely.\u00a0 Therefore, we\u2019ve seen an exodus from big expensive cities to lower cost areas.<\/p>\n When you rent you have the mobility to do this.\u00a0 When you own you are \u201ctied down.\u201d\u00a0 Yes, you could sale your home but that takes time and it can be a lot more costly.\u00a0 In addition, it might not be the optimal time to sale your home.<\/p>\n 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\u2019t take it simply because they just bought a house.<\/p>\n Rent vs buying a house pros and cons: This is a pro for renting.<\/strong><\/a><\/p>\n Financial risk is extremely hard to gauge.\u00a0 Most people refer to financial risk to owning a house as one of two types of risk:<\/p>\n I\u2019ll tackle both of those risks and then share with you the \u201creal\u201d risk that I think is more important.<\/p>\n Finance professionals will say home ownership is more financial risk because they are looking at your budget.\u00a0 Most of the time your monthly payment is higher for a house than rent.\u00a0 However, probability says that you will be able to maintain your mortgage payments.\u00a0 If you couldn\u2019t, then you shouldn\u2019t have gotten the loan in the first place.<\/p>\n Therefore, yes a mortgage adds financial risk to your profile (for those of you that are FitBUX Members you\u2019ll see your FitBUX Score<\/a> decrease when adding a mortgage).\u00a0 However, you have to ask yourself how likely is this risk and is the return worth it (more on return below).<\/p>\n The second risk is that your home goes down in value.\u00a0 Yes this is correct. However, we aren\u2019t referring to an investment house that you are looking to flip in a few years.\u00a0 Most of own homes (I\u2019m not referring to condos, only homes) for the long-term.\u00a0 Therefore, as long as I\u2019m making my mortgage payment, I\u2019m playing the long game and this shouldn\u2019t matter.<\/p>\n 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\u2019t think of.\u00a0 I mentioned above multiple times \u201cas long as you are able to maintain your mortgage payment.\u201d<\/p>\n The financial risk in owning vs renting comes when you face financial catastrophe.\u00a0 This catastrophe can be unemployment or an unexpected medical event.\u00a0 In these cases, people say to limit the risk with an emergency fund<\/a> but that might not be enough\u2026 I\u2019ll explain below with an example.<\/p>\n If you are renting, in order to maintain your rent, you have to begin using your emergency fund.\u00a0 At some point you\u2019ll hit zero and can\u2019t afford rent.\u00a0 In many states, the eviction process is very quick. I.e. you\u2019ll be out of the house fast and now you have to find a place to move to as well as potentially store your belongings.<\/p>\n Contrast that with owning a house (and this is counter intuitive).\u00a0 You wouldn\u2019t have to use your emergency fund for the mortgage\u2026 What??? You may be saying.\u00a0 The foreclosure process for a home is long relative to the eviction process if you\u2019re renting.\u00a0 It can easily take 6 \u2013 9 months to go through foreclosure.<\/p>\n Therefore, you can stop paying your mortgage and use your emergency fund for day to day expenses like food.\u00a0 Yes, you may get behind on the mortgage but you\u2019ve bought yourself time and have \u201cstretched out\u201d how long your current funds will last you.<\/p>\n In another case, you could have equity in your house.\u00a0 At that point you should have a line of credit you can draw on in case of an emergency.<\/p>\n For these reasons, in this worst case scenario, owning a house actually has less financial risk than renting.<\/p>\n Rent vs buying a house pros and cons: This is a pro for renting<\/strong><\/p>\n <\/a><\/p>\n Note before we begin: this will be different for everyone because costs are different in various locations.<\/p>\n You have to look at this statement in two different time periods: Today and Tomorrow.<\/p>\n Today:\u00a0 <\/b>It is a general belief renting is cheaper on a month-to-month basis and yes this generally holds true.\u00a0 Where I see people make a mistake is when they simply look at their monthly rent vs a mortgage payment.\u00a0 You shouldn\u2019t compare rent to the mortgage payment.\u00a0 It should be compared to home ownership expenses which includes the mortgage, insurance, taxes, and housing upkeep.<\/p>\n Tomorrow:<\/b> When you finish paying off your mortgage you have no more expense\u2026 this is not entirely true.\u00a0 The way I personally look at it is you are renting when you own a house\u2026 Let\u2019s think about this deeper\u2026<\/p>\n When you own a house you have to pay property taxes.\u00a0 If you don\u2019t, the government will kick you out of your house. When you rent you have to pay the monthly rent, if you don\u2019t the landlord will kick you out of the house. \u00a0 In short, using this line of thinking, the government is your landlord when you own.<\/p>\n Therefore, depending on where you live,.0 property tax can be a massive expense in retirement.\u00a0 I\u2019ve personally meet some retirees who had to move because their property tax bills increased to a point it wasn\u2019t affordable.\u00a0 Add this to home insurance and home upkeep expenses and owning a house even after the mortgage is paid off can be very expensive.<\/p>\n Rent vs buying a house pros and cons: This is a pro for renting.<\/strong><\/p>\n <\/a><\/p>\n If you listen to the \u201colder\u201d generation, housing is the best investment in the world.\u00a0 Its because they bought their house for 60k fifty years ago and today its worth 600k.\u00a0 However, most of the time when you factor in the cost of the mortgage, the property tax, home upkeep expenses, insurance, etc\u2026 the return on investment of your primary home isn\u2019t that good.<\/p>\n In fact, many financial professionals say home equity is the worst asset because it\u2019s a dead asset.\u00a0 They use that argument to say why home ownership is a bad idea.\u00a0 I\u2019m going to explain why these professionals in my opinion are wrong. However, I\u2019m first going to share with you two goals for housing that I believe everyone should have.<\/p>\n 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.\u00a0 I can\u2019t begin to tell you how many people I\u2019ve seen enter retirement still having to pay a mortgage.\u00a0 In the short-run, most will realize they shouldn\u2019t have retired and have to go back to work. Therefore, if you own a house pay it off or retirement will be stressful.<\/p>\n If you are going to rent then this is what you want to try and do.\u00a0 Estimate what the total housing costs would be if you did buy. Subtract your rent from that and invest the difference.\u00a0 For example, if your total housing cost to buy was $3,000 a month and your rent is $1,400 a month, then you\u2019d want to invest $1,600 a month.\u00a0 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)<\/p>\n Ultimately, you are trying to have your primary housing cost, your mortgage or your rent, taken care of by the time you hit retirement.<\/p>\n 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.\u00a0 Then they\u2019ll ask why wouldn\u2019t everyone do that? The answer is behavior.<\/p>\n The number one thing that separates FitBUX<\/a> from other financial companies is our inclusion of human capital into our technology<\/a>.\u00a0 Human capital includes the analysis of behaviors to help determine outcomes.\u00a0 Therefore, we analyze a lot of behavior\u2026<\/p>\n In short, most people don\u2019t have the behavior to do Housing Goal #2.\u00a0 They rent and instead of investing the money they \u201cblow it.\u201d\u00a0 Therefore, owning a house and paying off the mortgage is an easy way of maintaining discipline while building an asset.<\/p>\n 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.<\/p>\n Rent vs buying a house pros and cons: This is a pro for owning.<\/strong><\/p>\n By Joseph Reinke, CFA<\/a>, Founder of FitBUX<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Should you rent or buy a house is one of the most complex questions to answer in the world of personal finance. It\u2019s 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 […]<\/p>\n","protected":false},"author":1,"featured_media":13396,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1899],"tags":[1896],"class_list":["post-13391","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-archive","tag-mortgage","post-wrapper","thrv_wrapper"],"yoast_head":"\nShould You Rent Or Buy A House: Stress & Anxiety #1<\/h2>\n
Should You Rent Or Buy A House: Stress & Anxiety #2<\/h2>\n
Should You Rent or Buy A House: Financial Risk<\/h2>\n
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Should you Rent or Buy A House: It’s Cheaper To Rent<\/h3>\n
Should You Rent or Buy A House: Owning Is A Good Investment<\/h2>\n
Housing Goal #1<\/h4>\n
Housing Goal #2<\/h4>\n