Is It Better to Buy or Rent?

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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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1 Mrs. Money

Ummm… depressing! I love our house but at the same time wonder if we made the right decision. Can’t go back in time, though. 🙁

2 No Debt Guy

Although I am a big fan of home ownership, that is a choice I make for myself. I work with a guy who pays his $500 a month for rent and is happy with that. Good for him. He is not tied down and is totally mobile. Sometimes I am jealous of him.

3 swetha

can any1 say the logic behind rent vs buy calculator

4 Lakita (PFJourney)


Maybe the answer lies somewhere in between. Most of the research I’ve read assumes a 30 year fixed….but what about a 15 year fixed? What does that do to the numbers?

Of course, if people go this route it means larger payments or buying “less” house…but it would be interesting to see the numbers.

5 Robert Espe

great question. The key thing to realize is that no matter how long any loan is, you will pay more interest than principal for the first half of the loan. On a 30 year mortgage, it takes 15 years to start paying more principal than interest, on a 15 year, it will take about 7.

6 Matt Jabs

Lakita, your thought to shorten it up is good – the shorter the period of debt the better – and what Robert says is indeed the crucial thought pattern we all need to grasp.

7 Ronnie

Wow! Those numbers are an eye-opener. I went for $1900 rent (most I will ever pay, and more than I pay now), a $350,000 house with 20% down–still more than reasonable in the Northern VA area, and left the remaining numbers the same, and it’ll still take 11 years to come out ahead buying. If I put in my actual rent and my actual projected increase over the next 4 years, I’m looking at 16 years. Am I stupid for still wanting to buy? Perhaps, and something to think about, but we’re not near that point yet, so we have time to think about it. Thanks for that link!

8 Matt Jabs

No problem Ronnie. I know how home shopping is… it can be extremely tempting. My advice is to separate your emotions from the decision as much as possible and focus on the numbers first. Once the numbers make good financial sense… then let your emotions run wild. 🙂

9 Mr Credit Card

After 10 years of renting, paying a mortgage feels like credit card debt to me even though I’ve never carried a balance on my credit card!

Why do we always aim to save for a downpayment? Why can’t we all aim to save for the whole house?

I still think owning your own property is the best thing…but to have a mortgage hanging over my head is simply irritating..So Matt, I’m like you…trying to pay this off ASAP!

10 Matt Jabs

PRECISELY Mr. CC! Setting a goal for down payment should the least of our goals. Saving the entire amount is far more wise, yet almost looked upon as foolish or unreachable these days… crazy.

11 Alissa

I’ve never commented here, but I felt compelled to- what about the people who live in areas where rent is the same as or more than the cost of mortgage? This is especially true when you make a down payment on a house.

12 Robert Espe

I live in such an area, and have lots of co-workers who buy in their first year down here because of it. A big part of it is how big a place you rent, and where you rent it. I rent a $700 1 bedroom, which most people consider too small. Two and three bedrooms range up to about $1100. My co-workers are mostly getting mortgages in the $1100-$1200/month range on 30 yr notes.

BUT, first remember that owning comes with more expenses than just the mortgage. You have to add property taxes, PMI, interest paid, extra utilities, Home Owner’s Association dues, lawn maintenance, home maintenance, and Homeowner’s Insurance.

What I’m discovering, is that even in an area where on the surface, rents and mortgages seem similar, cheaper rents can be had if you know where to look. Right now I am looking at a new apartment. It will be $495/month instead of $700. It is still one bedroom, but is larger than the one I’m in now. What do I give up? I will live 4 miles farther from work, give up the (usually broken) security gate on the complex, and be living in a “less nice” area of town, but still right next to a school and the mall.

13 Matt Jabs

Cool Robert… are you planning on moving then?

14 Matt Jabs

Hi Alissa… thanks for commenting, don’t make this your last time – getting involved in the discussion can make personal finance more “real” to you and can motivate you to keep a solid grasp on your finances.

Per your comment, what Robert said is pretty much spot on… there are a lot more expenses associated with home ownership than with renting.

15 Awareness Home Funding

There is not a clear cut answer here. You need to do some homework and understand why you are making certian purchase/fiancial decisions. For someone always living on the edge of financial crisis or moves frequently, renting is a better choice. For someone else who sees a house as a long term investment and doesn’t intend to move every couple years, buying is a good option.

16 Matt Jabs

It is definitely personal… there is just so much need to raise awareness to the power of saving and the power of debt.

17 Paul Williams @ Provident Planning

Matt, I may be wrong, but I think you should have used 4% for the annual home appreciation rate.

If homes appreciate just one percent more than inflation every year, on average, then you’re talking 1% plus 3% (for inflation) as the actual rate.

If you’re going to use 1% for home appreciation, then you should have said that rent increases at 0%.

18 Matt Jabs

Great question Paul… but the inflation rate is already figured in… you can find the estimated annual inflation rate under “Advanced Settings” in the top right of the calculator on the “General” tab.

Actually, I had the inflation rate down to the default 2%… if I raise it up to a more realistic 3% mentioned in the article, my decision to buy is even more mathematically bleak.

19 Paul Williams

Well, I can’t see the data in the calculations, so I’m not sure exactly how they’re using it. But I do know that if it were supposed to be the inflation-adjusted rate of appreciation, that’s what they should have called it. I don’t see that in their methodology or in the instructions they provide. At least to me, “annual home price appreciation” means the total % increase in the home’s value every year (on average).

They could do a better job explaining how the calculation works and showing the year by year data so it can be verified. But most people don’t care or won’t check it anyway… 🙂

20 Matt Jabs

Like you said, most people won’t care to get that granular… but it sure is a great resource to help open peoples eyes to the power of mortgage debt vs the possibility of renting. Raising awareness is crucial, as you know.

21 RJ Weiss

I have always believed that you should take out the numbers completely. There are too many variables for one to consider.

Instead, just ask yourself do you really want a home? If that is your dream, make it work. If it’s not, just rent.

22 Matt Jabs

Woosh… I don’t know about that RJ. That line of though can get you into fiscal trouble real quick.

23 Theseus Ocean

It depends on if you are in it for the long haul. The “Now” generation would probably be happier renting for a while until they can afford the mansion they’ve been told is coming to them. I guess as a landlord, I am definitely going to argue for ownership over renting because I see people paying my mortgage for me every month. Not that I want that to stop, but I won’t ever pay someone else’s mortgage again.

24 Daddy Paul

When you buy a home is just as important as what you buy. To me it seldom makes sense to rent. I was looking at a very nice duplex a few miles out of Lansing this summer. I think I could have got it for less than 45 grand and it needed 5 to 10 grand for some roof work and carpet. Why rent and pay 800 bucks a month?
I did not buy the place because I do not like my investments calling me at 4:00 AM telling me the toilet is plugged.
Your 165,000 house is worth about 90,000 today but wait a few years it will be worth a quarter million in no time. When you rent all you have is a box of rent receipts.

25 Daddy Paul

Home price = $165,000
Annual property taxes = $3,200
Get your home re appraised now that house prices are in the tank. Ask a few realtors who will do the best job for you. Take the appraisal to your board and get the State Equalized Value reduced. My guess it will save you 600 bucks a year as long as you own your home.

26 Matt Jabs

In Michigan we have a March board of review for property taxes. I have not received my new numbers yet… but if the reduction doesn’t match the market then I plan to challenge the numbers before the review board.

It’s also worth noting that people who are looking to sell soon should NOT try to lower the taxable value of their home, otherwise they work against the sale price of their home.

27 Ted

I love this discussion! We have owned our home for 4 years. We already had to refinance due to getting a 3 year arm (not to smart on our part/bad advice from mortgage guy).

I wish we would have rented because it gives you flexibility. But when we chose to buy it was cheaper to buy (now its cheaper to rent in our area). Our home is back to its value we bought it at (which I hear is a good thing in comparison).

But I do love having a house I can work on and keep it at the level we like it. I also like not having to deal with a landlord. But we now are ‘stuck’ in our house and we need to move. I now work out of the house and we have two kids. There is no space for an office (even a frugal office). Ugh, so we need to move in the next year or so. The question is do we stick it out to get a 5% or more for a down payment, or do we rent and spend a few years saving for a larger downpayment? I think if you are going to buy, save for a larger down payment, that way you can get a better rate and survive a bit of a dip in home value.

I am a fan of renting now!

28 Matt Jabs

Either that or save the entire amount, then buy. Many people think this is foolish, that’s okay. I think taking on enormous amounts of debt and presuming upon future income is far closer to foolish than saving then buying. Remember that I hold 2 mortgages as I say that… hind sight is 20/20.

29 Neil

Does anyone else find it odd that when houses are expensive, everyone thinks they’re the path to wealth, prosperity and a happy retirement. Then when buying a house is relatively cheap (or at least close to the historic, inflation-adjusted normal), everyone changes their mind and decides they’re not such a good idea.

It’s the same logic that lead one of my coworkers to transfer all of her retirement savings from mainly equity funds, into government bond funds. In February. Taking almost the full brunt of the down cycle in the stock market, and locking it in.

I agree it’s a complicated question, but judging it based on short term market performance is a bad idea, and anyone who’s changed their mind in the past couple of years is doing exactly that. It’s all part of the bad habit people have of viewing their home as an investment rather than an expense. A second property is an investment, probably a poorly performing one, but the first is just what you pay to have a roof over your head. I’ve also seen a well thought out argument that renting is effectively shorting the housing market (the argument was actually that we’re born with a short position in housing). Which makes sense.

30 Matt Jabs

Good point Neal. Down markets are no reason to get out of your house; huge debts and high interest are… and these exist in both good and bad housing markets. If anything people should try to hold through a down market whenever possible.

31 Christina

I am in the process of deciding whether to pursue buying a home or renting out. I already reserved a property and now I still don’t know if I need to pursue it. I hope I read your article earlier to help me decide, I will lose a certain percentage of my reservation if I will not continue it. I never realized I have to consider so many factors. I just linger on the thought that instead of paying my rent going to nothing, well of course we’re living on it but instead of just paying my rent, it will later on be ours but then I need to decide with regards to finances. sigh…

32 Robert Espe

Have a look at my article from a couple weeks ago on the “throwing money away” issue. Odds are you will throw away just as much on interest payments for the first several years of the loan. Usually true for about half the duration of the loan.

33 LeanLifeCoach

A few months ago I went through a lot of this thought myself (unfortunately 3 years after buying another house!) I wrote about it and came to the conclusion “Good Debt, Bad Debt – All Debt Sucks!”

If I could do it again I would have bought half the house (already half of what I could “afford”, paid it off ASAP and then saved and rolled equity in the next house for cash. Rinse and repeat until I have the dream home with little interest and all equity!

Coulda, shoulda, woulda… I am now following a 12 year plan on a 30 year mortgage.

34 Matt Jabs

“Good Debt, Bad Debt – All Debt Sucks!”

Can’t argue with that! 🙂

35 Forest

I do think it’s worth buying but only if you can pay outright…. Just think 3 years 24k saved…. So mix that 24k saved with savings and a house could be bought outright in bout 8-10 years and all that nasty doubling interest could be saved.

That’s my take on it 🙂


36 Financial Samurai

I’ve used this calculation before. One of the KEY determining factors is what your tax bracket is. The higher your tax bracket, the more it makes sense to own.

Play with the rates yourself.

37 Matt Jabs

To me the tax bracket you’re in is much less important than the amount of money you have actually saved for the purchase you’re looking to make.

It sounds old school & retarded to some, but people should really save money before they spend it rather than spending it before they save it.

38 Financial Samurai

Saving money before buying a house is definitely a given. I have a 30/30/3 rule, where you should have 30% of the value of the house saved in cash. $500,000 house, have $150,000 in the bank so you can put down $100,000 and have a $50,000 buffer.

Since savings is a given, it is not the point of debate for buying and renting. Your tax bracket makes a HUGE different in how you calculate the return from this calculature.

If you don’t have at least 20% saved up, and you are in the 28% or lower tax bracket, it’s probably not worth it.

39 Robert Espe

Interesting to me that even though you would finance after saving 30%, 30% for you is the purchase price of a home for most of us. So in a way, you agree with Matt and I that saving $100-$150k in cash is doable.

As for the mortgage interest deduction, It can be described as spending $100 to save $20. It doesn’t really save you anything, just keeps you from being taxed on some of the money that never went into your pocket anyway.

40 Debt Free Dude

Traditionally buying a house has been seen as a good investment. But traditionally people didn’t move as much as they do now. My grandmother lives in the home she and my grandpa bought back in 1945.

My parents have lived in one apartment, a house and then one a farm (where they have been for the last 30 years). I have lived in six different places since my wife and I got married. This mobility makes renting look a lot more appealing.

Another thing that often gets overlooked: Do you like being a handyman? If you do, there are a lot of little things that won’t cost you much in dollars where you can keep your house in good repair. If you have to hire someone for every single thing that needs done, renting may be a better option for you.

41 Matt Jabs

Yeah, home repair costs are commonly brushed aside when people compare renting against homeownership… all the more reason to carefully consider these decisions over long periods of time, so we can make sure.

42 Tony

Excellent article Matt. Finally somebody shines the light on this subject from a different perspective. One point that you did not discuss was the ability to input your investment return percentaje in the calculator. This is the return on the money you save by renting. That was the key point for me.

4 years ago I came to the decision I would rent instead of buying a place and put all my money to work in different investments. I now have $320K invested and no debt. I feel great. Once I retire I will then buy a humble place where I know I’m going to spend a long time in and pay cash for it.

Things have changed in America and not many people realize this, higher property taxes (3% here in Houston), and lower GDP growth will make it very dificult for houses to appreciate considerably in the future.

43 Matt Jabs

Thank you for shedding light on this specific and important variable Tony! Great job… you should write a guest post for me about this! What do you say?

44 Blah Blah Black Sheep

My thoughts have always been that a home is a tangible good, and it will depreciate in value regardless of what the market does. Eventually, just like a car, the older a home gets, the more you’ll sink into repairs. Things will deteriorate. The neighborhood will get older. The house will get older. Sure, you can sell the house and move to a newer neighborhood, but then you’re having to time the market, and could be at the mercy of said market if it’s tanking and you desperately want to move.

A home is not an “investment”, unless by “investment” you mean “peace of mind of having some place to come back to that you own”. For the money most folks toss at creditors to borrow the money to buy a home, they could be renting, and then tossing whatever’s left over into a mutual fund or investment account that will get far greater returns. Then, when the time comes that they’ve saved up enough and the housing market is favorable for buying, they can pull the money out of investments and buy a house free-n-clear, without having to borrow money for it, which would inflate the value of the house by however much interest you would have paid.

It’s actually quite ridiculous how the whole “american dream” has folks essentially getting into debt very early in life so they have to slave away to pay things off before retirement. Student loans, car payments, house payments, credit cards … people have lost the common sense of living at or below their means, and only buying what they can afford right now, not what they think they can pay off in the future.

And yet when I explain this to people, they look at me like deer caught in the headlights and think I’m an idiot. And yet, I’m young, single, have no debt what-so-ever, everything I own is paid off, I rent, I pay for my schooling as I go instead of getting student loans, and since I’ve had money to toss into the market since it’s tanked, I’ve seen a nice return on my investments as the market’s started to pick up. Meanwhile, folks I know own their own homes (and mortgages), have new cars (and car payments), complain when the market tanked because they were too dumb to move their money out before it lost value, they have student loans, they have 3 kids they have to pay for, etc, etc…they have the american dream, are unhappy, and they’re trying to tell me that I’m the one who has it all wrong.


45 Mitch

We are looking right now to buy. Found a 2/2.5 that we love priced at $67k. We currently pay $850/month in rent for 2/2.5. While we don’t have much for a down payment, we do qualify for FHA loan. The home purchase would put us in a bigger home (sq ft wise) that is about 18 years newer (’88 or ’89 vs ’06) with a mortgage payment, PMI, taxes, HOA less than our current rent

46 Matt Jabs

Hi Mitch, I know how badly you and your significant other must want to get into a house right now, but I would encourage you to AT LEAST save 20%. If you cannot do that, then you should not be buying.

47 Money Funk

Great post, Matt. i was always curious about the rent vs buying debate. As I would assume buying is optimal. However, I see why in certain circumstances it would be better to rent.

I still side with buying if the rates are in your favor. Because i think it ties in with a more personal choice, in that you get to redecorate, renovate, make it your home. Granted, if something goes wrong you are responsible for the fixing.

With renting, the landlord is responsible. You, as a renter, are tied into rules about remodling, etc… And even if you do remodel, it is not your work to keep. Plus, I have had too many complications with landlords about getting things fixed or updated. I would rather have the upper hand in that.

48 annej

You haven’t considered the entire picture…. credits for mortgage interest on your federal taxes which you don’t receive as a renter, homeowners rebates and/or credits on state taxes, which you don’t receive as a renter, etc… owning a home is better as a parent for FAFSA reasons, your credit rating is better as a home owner….
I could go on

49 Larry

Considering the country’s current economic situation, I think renting offers the advantage of not committing to one place and not shelling out a large amount of money all at once. Renting gives the flexibility of moving easily and saves you from depreciation and major maintenance costs.

50 SB @ One Cent At A Time

Very few among us ever do a calculation before buying home. In my blog I encourage people to do basic math check on buy vs rent. As per my own calculation in my area renting is better while saving for home buying. This is the calculation, if any one interested..

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