Is it better to buy or rent” when it comes to finding a place to live? If you read my last post “Buying a Home, Is It a Good Investment?’ , you discovered that buying a house is not always a good investment if you’re looking for investment-like return for building wealth.
There are some cases where you can make a decent return over 30 years, but in many cases, the increase in value of the house doesn’t come anywhere near keeping up with the ongoing expenses such as maintenance, mortgage interest, insurance, and property taxes, which can actually result in a negative return on your investment in a home.
The old mantra says that buying a house is a good investment, and that renting is just throwing money down the drain. So when it comes to the question of whether to buy or rent, what’s the best route?
Buy or Rent, What To Do?
We discovered that if you bought a $200,000 house with a 30 year mortgage at a historically average 6% rate, and spent $125/month in property taxes, $125/month on maintenance, and $45/month for insurance, at the end of 30 years you’ve spent $519,876.
However, at a rate of appreciation of 3% over 30 years time, your home would only be worth $491,368. The result is that over a 30 year time frame, you lost $28,508, or about $950 per year on your investment.
What About Renting Instead of Buying?
Now let’s take a look at some of the numbers when it comes to renting a house instead of buying. Let’s start with some good news. When you’re renting you don’t pay property taxes, you don’t have any maintenance costs, you don’t pay any mortgage interest, and renter’s insurance is pennies on the dollar compared to homeowner’s insurance.
Renting sounds like a pretty good deal so far!
To run the numbers when it comes to renting, we will need to make some assumptions.
Let’s assume that right now you pay $500/month for rent, which is a low estimate for many areas. Of course, over time, rent increases. So we’ll assume that at the end of 30 years you will be paying $1,500/month in rent. Over that 30 year time period, the result is that you’ve paid an average of $1,000/month in rent during that time.
So over a 30 year time period (360 months) you have spent a total of $360,000 in rent ($1,000 x 360 months). Factor in renter’s insurance at $15/month for 360 months and you get $5,400.
That comes to $365,400 spent on rent and insurance over those 30 years. Not too shabby! That’s $154,476 LESS than you would have spent if you had bought a house and had a mortgage.
Those numbers show that you save a lot of money!
That means that over 30 years you would have spent $429/month less than if you had bought a house.
That’s definitely food for thought.
Now let’s evaluate what you have at the end of 30 years.
If you were a renter for 30 years, yes, you spent over $154,000 less over that time, but you really have nothing to show for it other than 30 years of someone else’s roof over your head.
You still have a rent payment to meet every month and the rent still continues to go up over time.
If you continue renting into your later years, in 25 years you will end up spending another $450,000 on rent ($1,500 x 300 months) at a point in your life when income is usually pretty limited. That number also assumes the rent never goes up over that 25 years, so that $450k figure is actually very low.
However, when you own a home instead of renting, at the end of 30 years you have no more house payment to pay and you have a physical property worth $491,368 that still continues to appreciate over time. You’ll still have expenses to pay such as property taxes, maintenance, and insurance, but they are much less than rent and are actually offset by the appreciation of the value of the house.
Your Future is at Stake
I’m not going to bore you with anymore numbers, but I believe it’s pretty obvious that owning a home instead of renting is much better in the long run because you’re building equity as long as you own the home. You set yourself up for a financial future that can be a lot easier to deal with in your later years because you own an asset that’s still appreciating, instead of paying rent payments that will only continue to rise.
If you ever reach a time in your life when you can no longer maintain your home or live by yourself, you have a physical asset that you can sell that can help to provide for you in those later years when lower income and high health care expenses tend take a toll on your finances.
Renters don’t have this option.
It’s obvious that the housing market has been pretty bad over the last few years, and a few uninformed people might try to convince you rent a home and never buy because owning a home is too “risky”.
But when it comes down to it, long term homeownership is far less risky than renting will ever be.