Which is Better: Renting or Buying a Home?

Photo (cc) by faul

Before our nation’s housing crisis began in 2007, the rent-vs.-buy question wasn’t really a question at all. Because the answer was: If you can afford it and you’re going to stay put long enough to recoup the transaction costs, you buy. Simple.

That’s because, for the generations leading up to the Great Recession, buying was always superior to renting for two reasons – one societal and one financial.

As a society, the belief was virtually universal that owning a home was simply what normal, stable adults do. Home ownership has traditionally been known as the “American Dream,” and anyone not in pursuit of it was assumed to be either transient or not able to measure up financially.

Owning a home was also the right idea money-wise, because there had never been a time in modern memory when home values, at least nationally, didn’t escalate over time. In addition, Uncle Sam provides investment incentives in form income tax deductions.

What a difference one recession/housing crisis can make.

Watch the following video addressing some of today’s issues regarding home ownership, and we’ll continue the conversation on the other side.

As you saw in the above video, today whether to rent or own your home has once again become a question, for one basic reason. Owning a home typically costs more than renting one. And if you’re not going to be paid back with appreciation, it may not be worth it.

Are calculators worth using?

There are plenty of online calculators you can use to try to help determine whether you should rent or own. For example, here’s one from mortgage guarantor Ginnie Mae. And here’s a really souped-up version from The New York Times.

But I wouldn’t waste too much time on these type of calculators. Why? Because the answer you’ll get will totally depend on the information you provide – information that you can’t possibly know. For example, among other variables, most calculators will ask you how much the house you propose to buy will appreciate annually, as well as how much equivalent rent will increase over time.

If you know the answers to these questions, you don’t need a calculator. You need to get a job on CNBC.

How should you decide?

As I mentioned above, the rent-vs.-own “question” only became a question again because property appreciation became a question. If housing was still appreciating, it wouldn’t be much of a question at all.

But consider this: If not buying a house for fear of falling prices makes sense, then it also makes sense never to buy stocks, since they also periodically decline. That’s not good logic for either stocks or houses. What falling prices of any kind teach us isn’t that it’s dumb to buy – it’s that it’s dumb to speculate. Over-leveraging yourself by gambling on short-term price swings or otherwise biting off more than you can chew has always been a bad idea.

I’ve been buying both houses and stocks for more than 30 years. Here’s my advice: Use the same rules that have always applied to owning a house…

1. Buy only if you’re confident you’ll be staying put for at least four years. That’s because buying a house has very high transaction costs, and because the longer you own it, the more likely you are to make money.

2. Hope for appreciation, but don’t count on it. You’ll gain equity in your house by paying off the mortgage. If past is prologue – and that’s usually a good bet – you’ll gain additional equity via appreciation over time. But the beauty of a house is that it’s an asset that you live in. Making a home into something that reflects you isn’t something you can take to the bank, but it is rewarding.

3. Don’t get in over your head. The average house in 1950 was less than 1,000 square feet. Today it’s more than twice that. Whatever you buy, you’re going to have furnish, heat, cool, and maintain. As I said in the video above, owning a house can cost 35 percent more than renting one, and owning takes more of your free time.

4. Wait until you’re ready. If you have bad credit and as a result are forced to take on a high-interest mortgage, it will likely cost you tens of thousands of dollars over the life or your loan. Also, the more money you put down, the less you borrow and the less risk you take. So don’t just be ready emotionally, be ready financially. Build your credit and your savings before you build your house.

Forget the calculators: Consider the factors above. If you don’t feel that you’re ready to own, there’s certainly no shame in renting. But if you do feel like you’re ready, I’d encourage you to go for it.

I live in one of the biggest former bubble markets – South Florida. When many of my friends were betting the farm and flipping houses five years ago, I was sitting on my hands. Now that prices are down 40 percent, they’re wiped out – I’m looking to move up.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
This Cellphone Carrier Has the Worst Network Quality, Customers Say
This Cellphone Carrier Has the Worst Network Quality, Customers Say

One major wireless provider stands out for the least reliable call, messaging and data services.

10 U.S. Jobs That Are Disappearing Fastest
10 U.S. Jobs That Are Disappearing Fastest

Think twice before pursuing these shrinking occupations.

3 Cable TV Companies Hiking Prices for 2020
3 Cable TV Companies Hiking Prices for 2020

Still married to your cable company? Hold on to your wallet!

Should You Hire a Service to Negotiate Your Cable and Other Bills?
Should You Hire a Service to Negotiate Your Cable and Other Bills?

Services like BillCutterz and BillFixers will negotiate your cable, internet, phone and other monthly bills in exchange for a share of the savings. I tried it: Here’s what happened.

How to Prepare Your Finances for Retirement in 7 Steps
How to Prepare Your Finances for Retirement in 7 Steps

Here is how to get your finances in shape for your golden years, one step at a time.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

10 Things You Should Never Do With Bleach
10 Things You Should Never Do With Bleach

Does the pandemic have you reaching for bleach more than ever before? Learn the ins and outs of using this powerful disinfectant.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.