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Renting Or Buying: Which Is Better?

Did you know that less than 40% of U.S. households live in their house for 10 years or more? Historically people tend to stay in their house for six years, although that number has crept up in recent years. 

Would people who live in their house for short periods of time be better off renting? Or, is renting the same thing as throwing your money away?

rent versus buy

Rent Versus Buy Debate

It seems everyone has an opinion about whether one should rent or buy. On the pro buy side, they say that renting is just like throwing money away or that you are paying your landlord's mortgage so why not pay your own mortgage. These folks tend to think that you get nothing for your money. 

On the other side of the debate, the pro renters say that they don't want to be tied down, that they don't have to worry about repairs and maintenance, and that a better use of their money is investing it or saving it.

Obviously, there is no one-sized fits all answer, so let's take a look at the pros and cons. 

Renting Pros

The pros of renting are that there is no large up front out of pocket cost. In addition, aside from the rent payment and renters insurance, there are no ongoing costs, no maintenance, and no hassle. Plus, your payment covers the renting of the space and your portion of the property taxes in one simple payment. 

If your dishwasher breaks, make a phone call and you'll magically have a new dishwasher installed. If the house leaks, make a phone call and it will be fixed. Easy peasy. One morning in an old apartment I lived in I awoke to the ceiling dripping next to my head. It was fixed by the time I got home from work. 

Renting Cons

When you rent, your rent tends to go up over time. This could be inflation, but it could be a spike in demand. Also, you could be asked to move out if the owner wants you to. 

I used to live in an apartment complex that called themselves "luxury apartment homes" (which I always thought was a way to charge more...). Toward the end of my tenure there the management company sold the complex to a new management company and rent went up 20%. That's part of the risk. 

Buying Pros

When you buy a property or a part of a property, it is yours. Unless you signed some kind of neighborhood agreement or contract, you can do as you wish with your property. Paint it any color, take out walls, nail art on the walls, anything. In 15 or 30 years you will be done paying off the mortgage, so that part of your monthly cash flow will go away. 

When my wife and I bought our home one of the first things we did was put a fire pit in our yard and install some clothesline poles. We also have a very large vegetable garden no many landlords would be okay with.


Buying Cons

You need to part with a large chunk of money up front in order to buy to either cover your down payment or to buy the house outright (most people can't do this, but the possibility is there). Then you have a large debt looming over you. In addition to the amount of the house price you need to finance, there are closing costs, and other fees that will be added to the mortgage. The ongoing cash flow, in addition to paying back the money you borrowed (principal), you pay the bank for letting you use their money (interest), and property taxes (which go up with the value of the house). Your insurance is more and you have maintenance and repairs to worry about...and pay for. 

In the above pros and cons list I'm ignoring house versus apartment pros and cons because you can rent a house and buy an apartment (aka condo), so that is a different list. 

Time Matters

In the beginning, renting makes more sense from both a cash flow stand point - meaning your payments will be less each month and you can invest the difference - and an asset stand point - meaning you give up some cash to enter into the transaction. Over time, as rent increases in price and the major portion of your mortgage (principal and interest) stay the same, it becomes less and less expensive to own. Eventually you will own the property and your monthly payments will be taxes, insurance, maintenance and repairs. 

Non-Money Factors

Now, just because it may make sense from a money stand point to buy if you will live in your home for a long time and rent if you plan to move in the near term, doesn't mean that's the only factor to consider. There are non-money factors to consider. For example, if the neighborhood changes and you want to move, it is easier to do if you are a renter than an owner. Homeowners tend to live in their neighborhoods longer and develop relationships with neighbors. I'm sure you can think of others. 

The takeaway is that you should not think of your home as an investment. It is a place to live. In some situations if makes sense to purchase a place to live and in other it makes sense to rent a place to live. 

No Easy Answer

Carefully consider how long you intend to live in your home, how much money you have available to spend, what you can (and want to) afford going forward month to month, and what kind of flexibility you want. After spending some time with the pros and cons and making the choice that works best for you and your situation, your money health will improve. 

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About the Author

Derek Hagen, CFA, CFP, FBS, CFT-I, CIPM is a speaker, writer, and coach specializing in financial psychology, meaning and valued living, resilience, and mindfulness.


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