To Rent or to Buy?

Owning a home is a lifestyle choice.  A house is an expense, not an investment. It’s expensive (often a money drain) and time consuming.  If you are living there, it is NEVER an investment. The housing market is not guaranteed to keep up with inflation, and you may even have to pay extra money to sell if the market tanks and your mortgage is underwater.

BUYING A HOME IS NEVER AN AREA WHERE RECKLESSNESS IS ALLOWED.  You must go in entirely as a businessperson.  Your home takes up far too much money and time and is far too big a commitment to not be made without careful consideration.

Does buying even make financial sense?  If not, rent!  I would recommend plugging in your own numbers in the NY Times Rent vs. Buy calculator.  It includes financial aspects that are often overlooked.

Don’t consider buying a home if:

  • You have ANY uncertainty in home ownership.  
  • You are unable to save 20% for a down payment.  If you don’t have an emergency fund, you should build that up first.  Unexpected expenses always pop up, and you have to take care of them yourself.  When something breaks, you can’t just call the landlord.  Instead of buying a house, focus on finding ways to save money and build a strong debt-free financial foundation.
  • You are unable to buy a home close to your work.  Don’t own a home in exchange for long commutes that prevent you from spending time there.  Wait to buy, or find a new job.

Benefits of Renting

  • Control over your monthly budget – no replacing things that break.  Cost of renting can go up but the market dictates the rates and you can always move.
  • Flexibility of location – you can move anywhere you’d like!  There is little risk that you would have to forego an opportunity due to your illiquid asset.  You can always sell your house, but there are heavy transaction costs.
  • Apartments offer more travel flexibility – an empty house can be an easy target for break-ins.  The point is moot if you rent a house.

Benefits of Buying

  • You can mold the house exactly how you want it through renovations, or might even be lucky enough to find one that fits your needs perfectly without much work.​
  • There is added diversification in your portfolio.  I like to think of my house as my bond portfolio, and go 100% in index fund investing at my ripe old age of 26.  However, it’s still a real estate investment and there is still a risk of loss, as with all assets. 

Benefits of financing (Full disclosure - I have no intention of paying my mortgage down early!)

  • Insurance and taxes usually go up, but your mortgage payment will stay the same.  $600 now will purchase much more than $600 in 15 or 30 years.
  • Low interest rates mean you can invest your money elsewhere, like in index funds.
  • Forced savings through the principal portion of a mortgage – equity is slowly building as I repay the loan.

Tips for shopping:

  • “Dream home” is an expensive illusion designed to make you spend more money than you would otherwise.  Stick to a business mindset.
  • Make a thoughtful list of everything your house needs to have that would be a deal breaker if missing, everything you want it to have that you’d spend money to modify if it was missing, and things that would be nice to have but are not required.  
  • The one thing you can never change is the physical location of the house.  Write out all the places you go each week, and make sure that the house location is convenient. (Close to work and preferably within biking distance of everything you need.)
  • Spend a lot of time doing research!  It’s not possible to spend too much time researching.  Your housing choice has a huge impact on your future.
  • Tour a bunch of houses, either with a realtor or through visiting open houses.
  • You want the “worst house in the best neighborhood,” but be extremely cautious not to acquire more house than you will actually need over the next few years.  Taxes, insurance and maintenance will use up a large portion of money that you could have put elsewhere.