Why the Buying and Renting Debate Is Completely Meaningless
After a lot of savings, I recently bought a house, which took some of my friends by surprise. “I thought you were against home ownership,” they said, because I think rent is undervalued. Even as a homeowner, I still think the rent is undervalued. But that doesn’t mean buying is a bad decision. The lease-buy dispute in general is just plain silly and ignores the huge gray area that exists between the two options.
Renting and buying is fundamentally neither good nor bad
For years, buying a home has been the yardstick for financial success. However, the housing crisis turned this idea upside down, and people realized that buying was not always smart. In fact, I recently came across quite a few articles ( or at least headlines) that actually say that buying a home is a dumb decision. If you dig into the essence of these articles, they explain that, of course, buying a house can be a good decision, but their headlines summarize the conclusion: buying a house is a silly money move that sounds reasonable.
We have reevaluated the dream of home ownership for many years, but now it seems that we are taking it to the other extreme. So how have we gone through the years thinking that home ownership is a smart financial move towards the current belief that it is one of the worst financial moves you can take? To answer this question, it is helpful to see both sides of the argument .
Strong buying arguments are usually:
- When you pay for your home, it’s yours. You eliminate housing costs as soon as you pay them.
- If the home is valued more than you paid in mortgage, interest, taxes, and upkeep over time, you have earned income or paid off.
- Tax breaks help offset part of the cost of home ownership.
And no less compelling arguments in favor of renting:
- Owners can own their home but pay hefty interest and taxes.
- Renting is not a waste of money – you have a place to live.
- A purchase has an opportunity cost – the amount you can invest and earn from down payment, taxes, insurance premiums, and interest.
- Renters do not need to pay for repairs, maintenance or similar issues.
All these points are valid, and I also took them into account in my own decision. However, the fact is that in all of them there is a huge number of gray areas – individual factors, so there is no point in arguing that any solution is the best. These factors are important, but debate about them is useless, because the answer depends on the specifics: rental price, interest rates, and so on. Buying a home can indeed be a bad financial move, but for many it is not.
In other words, none of the options are inherently smart or stupid, despite the conventional thinking and headlines you might be led to believe. It all comes down to calculating some numbers, perhaps changing your attitude towards home ownership and protecting your finances.
Individual factors make simplification impossible
When you buy a home, you pay for something that you shouldn’t pay as a tenant: loan interest, property taxes, insurance, and even maintenance and repair costs. This is part of the lease argument: there are so many additional costs and factors that are overlooked. However, this applies to both sides and the details vary depending on the situation. Here are a few factors that are commonly overlooked .
- How long you live at home: This depends on the market, but in general, the longer you stay at home the better as your expenses are spread over time.
- Cost of housing in your area: Most of the time people rent because houses are too expensive, but it depends on the market in your area. If renting in your area is very expensive, it may be cheaper to buy a house.
- The Opportunity Cost of Your Taxes and Insurance : What long-term profit could you make if you instead invested that money in the stock market, CD, or even a “high interest” savings account?
- Opportunity Value of Your Down Payment : Likewise, what income could you have earned if you had invested this lump sum instead?
These are just a few factors and are still far from definitive in either direction. There are many caveats to consider. For example, the opportunity cost is great, but are you going to invest this money or are you just hoarding it in your checking account at low interest rates? If you’re not getting the bang for your buck, it’s a moot point.
It is impossible to say that renting or buying is the best solution for everyone, because each of these factors (and more) depends on your unique situation. You have to consider where you live, what kind of house you are looking for, how much rent you pay, how much you will pay in the future … the list goes on and on.
The New York Times Rent vs Buy Calculator is undoubtedly the best we’ve seen to simplify these complexities, depending on your individual needs. However, a calculator might not be that much. This may give you the best long-term solution on paper, but that doesn’t mean it’s the best solution for you .
For example, when my fiance and I did our math a few years ago, a calculator told us that the purchase would be better if our rent was over $ 1,500 a month. At the time, our rent was $ 1,600, so the purchase would technically make more sense on paper. However, our down payment would have been less than 10%, and apart from a small emergency fund, we didn’t have much savings. If one of us lost our job, we would have problems paying off the mortgage. All this was enough to postpone the purchase, despite what the calculator said.
The point is, as far as it comes down to numbers, there is still something else that is needed to make a decision. You have to consider availability.
Your home is a purchase, not an investment
Most experts agree that you shouldn’t think of your main home as an investment. Contrary to popular belief, real estate hardly outstrips inflation over time. Sure, you can time the market, flip the house, or buy a lease, but that is different from expecting your main home to make a nice profit for you. The investing myth is another compelling argument against buying. Many people buy homes that they cannot afford or stretch their finances to pay for expensive housing projects because they agree with this myth .
Experts agree that buying can be a bad investment, but the problem is that many people misinterpret it as saying that buying a home in general is a bad idea . The fact that your home isn’t a good investment doesn’t necessarily make it a bad buy .
Any purchase is subject to individual availability. Most people are familiar with the 20% rule when buying a home . Whether you are putting in that exact amount or not, you should avoid buying a home that you cannot afford. But how do you define “affordable”? This is where the rules of thumb come in handy. While it may sound contradictory to offer rules of thumb when we talk about tailoring your case, they give you some reasonable guidelines to follow.
For example, the 25% rule that your housing costs should not exceed 25% of the salary you receive is good for this. However, this is not just your monthly payment; you also want to make sure you have enough cash in reserve in case of an emergency. In other words, don’t be poor.
Of course, there is the emotional aspect or the American dream of home ownership. However, if the numbers don’t add up and you will be poor, buying a home for the sake of ownership is pretty pointless. The sense of satisfaction you get from ownership is offset by the risk of losing it to the bank. If the numbers don’t add up, however, and your monthly mortgage payment isn’t going to be financially ruinous, that’s a different story.
The bottom line is that sometimes it is more profitable to rent out, and sometimes the purchase can be good for you. Instead of yielding to one side or the other, it’s more helpful to learn the rules, figure out the numbers, and then do what works – and feels right – for you.
This post was originally published in 2016 and was updated on November 5, 2020 in line with Lifehacker’s style guidelines.