Renting vs Buying

Sometimes You Choose Between Building Wealth and Having a Life

Investing in real estate, whether for profit or to avoid “throwing your money away” by renting a home, has inherent risks. But, renting throughout your adult life comes with a certain amount of insecurity as well, and can make building wealth considerably more challenging. Most people in the United States, all the way back to Thomas Jefferson, would tell you that home ownership is the path to freedom and security.

But buying a home is far from a sure thing in terms of making an investment. Just ask anyone who purchased a home when the overall market was at its peak in 2006 or 2007 only to have to wait the better part of a decade in order to get “right side up” or “out from underwater” on their mortgage.

There are no absolutes in terms of whether buying or renting is the right thing to do. However, depending on your circumstances and where you are looking to rent or buy, there are some general considerations that may make the decision a bit easier.

 

When Renting Just Makes Good Sense

Depending on the type of person you are, there can be serious financial benefits to renting over owning in most markets throughout the country. Studies have shown that if a person was to invest the same amount of money they would normally spend on a down payment in a variety of stocks that simulate the general risk involved with homeownership, that at the end of eight years, the investment in stocks came out ahead of the appreciation and equity realized by the investment in a home.

Regardless of which is better in terms of building wealth over the long haul, buying a home in many urban markets throughout the United States can seriously cut into a person or family’s quality of life.

With property values now all but recovered from the Great Recession, the income to debt ratio associated with purchasing a home in many urban markets has made homeownership unattractive or all but impossible for those who aren’t earning well above the median for their area.

 

When You Should Seriously Consider Becoming a Homeowner

The verdict may still be out over whether it makes better financial sense to rent throughout your lifetime or to buy in general, but depending on where you live and how long you intend to stay there, there are strong arguments in favor of purchasing a home under certain circumstances.

Beyond the financial arguments, there is the sense of pride and security that comes with owning property and knowing that you won’t ever be subject to a no-cause eviction. If you are planning to stay in the same place for at least five to seven years and paying a mortgage won’t make for a considerable financial hardship (in comparison to renting a similar home), then homeownership can have serious financial benefits, as it acts as a type of forced savings account, building wealth for the homeowner over time.

Additionally, purchasing a home in a volatile market can help you lock in a livable financial situation for yourself as rents continue to rise around you. There are also tax advantages to owning your home, vs. renting.

 

When The Best Reasons May Not Make a Difference

For many, weighing the overall financial benefits of renting vs. buying and the relative financial hardship of purchasing a home in a developed or developing market will not even come into the decision on purchasing vs. renting. Many who believe in the power of homeownership will scrape together whatever they can to purchase a home, regardless of whether it’s a good idea in that market at that time, or not. Others may never believe that they’re in a position to consider buying a home, given what they wish to spend their income on. They may both be wrong and right.