Rent or Buy: The Nagging Question of Real Estate

For first time homebuyers and seasoned pros, one nagging question is whether it would be best to rent or buy. Everyone has an opinion, but the decision really comes down to two components:

1. Psychological
2. Financial

Psychologically, people have a sense of pride in ownership. It is a big deal to be able to point to a house and say “I own that”. There are also benefits to the community. Ownership, normally, leads to civic pride because the quality of a neighborhood leads to higher home values. Additionally, children who grow up in owner occupied homes have better outcomesthen children growing up in rentals.

However, you can’t quantify these psychological aspects of homeownership. There may be something in the value of higher expected incomes for children, but the discount factor on that gain would reduce it significantly and I don’t want to go into the complexities of trying to estimate it here.

You can, however, quantify the financial difference between renting and buying.

The Costs & Benefits of Renting

You can very easily calculate the cost of renting. Go look up rent on Craigslist. Boom, done.

Well, almost, there are some hidden costs there. Because you typically only rent for 1 year at a time, rents will change over time. There is implicit risk in one year contracts that you could be on the hook for higher prices next year. You also do not own the building you are renting in, so all of the income is going to someone else.

Each of the costs listed has a directly related benefit. The ability to move from one year to the next is also a benefit. If something unexpected happens, like losing a job or needing to move out of state, then you can downsize easily or pick up and move without a second thought.

You might not be building equity in the residence, but you’re not on the hook for any maintenance costs. When the toilet breaks or the garage door doesn’t work, you can call the landlord and get them to fix it.

The other benefit to rent is that you do not need to make a down payment. Instead of sinking tens of thousands of dollars into one asset, your home, you are free to invest that money in stocks, bonds, or a sweet ride.

Cost Summary: Rent paid, risk of higher rents, no equity.

Benefit Summary: Flexibility to move, more cash on hand, someone else pays for maintenance.

The Costs & Benefits of Owning

Owning has a lot more costs. The most obvious is the monthly mortgage payment. But the costs don’t stop there. Costs include:

1. Mortgage payment
2. Homeowners insurance
3. Property tax
4. HOA fees (If any)
5. Maintenance
6. Less cash on hand because of a down payment

There are additional, onetime closing costs when you initially purchase a home. They include:

1. Title Check Fee
2. Loan origination fees
3. Appraisal Fee
4. Miscellaneous fees

The costs associated with homeownership will take up their own post. But luckily there are a substantial amount of benefits to homeownership. They include:

1. A flat payment for 30 years that will get cheaper with inflation
2. Part of your payment goes to equity each month
3. A hedge against inflation

So the benefits can be substantial if prices go up over time and you don’t plan on moving for a while. They are even better if you find a deal on a home.