Over the last few weeks we have had some good discussions regarding the buy vs. rent debate. Robert gave us a few solid articles and many of you chimed in with great thought provoking comments.
But who is right? Does the fact that 30 year mortgages double home prices really make renting a better option than buying?
Is It Better to Buy or Rent?
The question is anything but simple, so it’s only logical to assume we’ll wind up with guys-n-dolls going to bat for both teams.
What are others saying? Thanks to help from a couple dinosaur comics and several atrocious years in the housing market, Get Rich Slowly founder JD had a change of heart on the matter. In his own words,
“One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.”
A few years back he felt home ownership was always the way of the dragon but now perceives the best reasons to buy are actually non-financial and/or personal, since the numbers often favor renting. I agree.
If you’re interested in reading more of JD’s take on this topic and many others be sure to grab a copy of his soon to be released book, Your Money: The Missing Manual.
Aside from JD’s point of view I also checked out several other takes on this topic. The wise consensus seems to be… neither option is best for everyone. I agree.
Buy or rent – crunching the numbers…
We’ll start by shooting a hole in the argument that “homes appreciate over the long term.” The truth of the matter is that home prices over the last 80+ years beat the inflation rate by a mere one percent. Sheesh, I get better rates in my Capital One 360 Savings account.
Laying aside emotional factors, let’s see if we can help you determine which option is best for your unique situation according to the numbers. After all… numbers don’t lie right?
This is where the bottomless pockets of big companies come in handy. They pay really smart programmers to dev really cool calculators that make really complicated formulas look really sexy. Check it out…
Is It Better to Buy or Rent Calculator
I used this awesome WSJ calculator to discover if it would be better for us to rent or buy (for the record, we bought nearly 3 years ago.) Here are the details of my calculation, complete with a screenshot:
- Monthly rent = $800 – this would be the maximum amount we would ever spend on an apartment in Lansing, MI.
- Home price = $165,000 – this was the cost of our home.
- Down payment = $0 – yeah I know… real smart eh? 😉
- Mortgage rate = 6% – the combination of our 1st and 2nd mortgage rates would actually be a bit higher.
- Annual property taxes = $3,200 – which is about 2% of the cost of our property each year.
- Annual home appreciation = 1% – despite our currently depreciated asset, I chose to go with the long term trend here.
- Annual rent increase = 3% – to factor in increasing yearly rent costs.
We have owned our home for only 3 years so we are still on the really expensive end of our mortgages, which made my self-audit especially hard to swallow… but I knew that going in.
Renting an $800 apartment for the last three years instead of purchasing our home would have saved my wife and I approximately $24,000.
Another factor worth mentioning, but not covered by the calculator, is the current value of our home. We’re upside down on our home by an approximate measure of $20,000 which leaves us unable to sell until that deficit is wiped out (either by us or by the markets, but likely by us.) Adding in the cost of our depreciated asset, home ownership, over the course of the last 3 years has cost us approximately $44,000 more than renting.
*sigh* Oh well… this just stokes my motivation to soldier on in passionate debt-slayer mode!
Try placing your numbers into the calculator to audit your own housing situation.
So… is it better to buy or rent?
Does the joy of home ownership outweigh the higher cost? Is sacrificing home ownership more than you can stand to do, or are you one of the few who have chosen sacrifice immediate wants choosing instead to rent, save up, and pay cash for your a home?
Ultimately, you are the only one who can answer that question… according to your unique situation.
If you are currently contemplating home ownership, I recommend being careful not to make partially educated decisions based mostly on emotion. Instead, run the numbers for yourself and be sure you have a full understanding of both the short and long term financial ramifications before making your move.
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