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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.

First-Time Homebuyer Credit – 2009 Returns must be filed on Paper (Form 5405)

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Homebuyer Credit – Form 5405

On 1/15/2010 the IRS released the new form and applicable instructions necessary for claiming the homebuyer tax credit.  Form 5405 is to be used for both ‘first-time homebuyer’ filers ($8,000 max credit) and, what the IRS is calling the ‘long-time resident of the same home’ filers ($6,500 max non-first-time homebuyer.)

Here are two quick bits of information that are sure to save you time, headache, and hassle.

1. 2009 returns MUST be filed on paper (you cannot eFile)

DO NOT let this credit effect your buying decision, but if you were already planning to take advantage of the homebuyer tax credit on your 2009 income tax return you MUST file your return on paper – you CANNOT eFile.

I touched on this point briefly in the article Tax Credits for Home Buyers and Owners but wanted to remind everyone once more in hopes that it might save someone the trouble of a rejected credit/tax return.

2. Homebuyer credit eligibility – no more guesswork

IRS form 5405 and its instructions remove any ‘guess work‘ regarding eligibility for the credit.

If you are unsure whether or not you qualify for the credit, simply download the form and instructions below and read them to determine your eligibility.  As much as I would love to answer every eligibility question here, it is better for each of us to read the information and apply it to our unique situation accordingly.  😉

Down load form 5405 and the applicable instructions here:

Is The $6,500 Homebuyer Tax Credit Retroactive for Existing Non-First Time Home Buyers?

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Many people want clarification on exactly who is eligible for the new $6,500 homebuyer tax credit.  Read on to see whether or not you qualify.

Here are two more recent posts on the matter:

The measure deals primarily with extending and expanding the homebuyer tax credit along with unemployment benefits and business tax credits.

A question looming large on the minds of a lot of many people is whether the $6,500 homebuyer tax credit will be retroactive or not. Meaning, if you purchased your home before the inception of the tax credits, are you eligible for a credit?

Unless Congress has a sweeping change of heart, to the discouragement of many American home owners the answer is NO.  As I mentioned in an article earlier, the wording in the bill goes like this, “shall apply to residences purchased after the date of the enactment of this Act.”  According to the bill the credit is being expanded to include a $6,500 tax credit to non-first time home buyers who purchase between November 7th, 2009 and May 1st, 2010.

So Exactly WHO gets the $6,500 credit?

  • Non-first time home buyers who have lived in their previous residence for at least five out of the last eight years but are selling that home and buying a new home by May 1st, 2010.  The new home must be used as a primary residence.

And Exactly WHO gets the $8,000 credit?

  • First time home buyers who purchase a home before May 1st, 2010.  The new home must be used as a primary residence.
Please note that… any home owner who sells the newly purchased home or ceases to use it as a primary residence within three years of the purchase date must repay the credit.  And in both situations the yearly income limits are $125,000 for individuals and $225,000 for couples.

Why Not Make the Homebuyer Tax Credit Retroactive?

When considered from the perspective of why the legislation was enacted in the first place, not extending the tax credit to existing home owners makes perfect sense.  They originally extended the credits to new buyers with the purpose of stimulating the housing market.  Simply passing the credit on to everyone who has purchased in the last five years would be disastrous and is quite unfeasible.

Will This Stimulate the Economy?

Ultimately the decision to extend these credits was made in order to further stimulate the housing market by encouraging existing home owners to sell their current residence and buy again.  Will this have the effect they are hoping for?  What do you think?

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.