Rent
vs. Buy: Why Buying a House Generally Wins:
I first moved to Ohio in June of 2010, and since I
anticipated living here only until finishing my PhD sometime in 2014 or 2015, I
decided to rent an apartment. In the three years and three months I’ve now lived
in Ohio, I’ve spent $26,205 on rent alone which does not include utilities. In
Akron, Ohio I could have bought a decent house for that much!
In retrospect, would buying a house have been a better
decision for me? There are many benefits of renting, especially for a young
single guy with limited free time. Not having the responsibility of
homeownership and unexpected maintenance costs is very appealing. I don’t have
to do yard work or worry about fixing a broken roof or water heater. If
something in my apartment breaks, even if it’s my fault, I call maintenance who
fixes it while I’m at work. The convenience of renting cannot be overlooked and
some also make the argument that home prices barely keep up with inflation at a
rate of about .2% annually. For comparison, the stock market increases at about
6%-7% annually. There are also closing costs, real estate agent fees,
homeowners insurance, property taxes, trash removal etc. In addition to the
convenience, these are all costs renters don’t have to deal with.
When you buy a house, you’re making an investment and building
equity over the long run, but you don’t have access to the value of your house.
When you own a home, you lack liquidity. Buying a house also ties you to one
location as the costs (both financial and nonmonetary) associated with buying
and selling homes makes it imprudent to do these transactions often.
Okay, that was a lot of evidence in favor of renting, but
the title advocates for buying a home. For a family that is looking to buy a
hose to live in for a long time, there is no greater way to build wealth than
homeownership. In 2010, the median household had $77,300 in total net worth and
$47,500 or 61% of that was from their home. Further, the median net worth of
someone who owns a house is $174,500 compared to $5,100 for someone who
doesn’t. Granted that last stat needs to be looked at in the proper context
since it encompasses the minority of individuals who can afford to buy a house
and choose not to, but is primarily made up of those people who cant afford to
own a house. That
data is further skewed by Millennials who are waiting to buy houses because
they are saddled with student loan debt.
When you look at it like this, each month’s rent is an
expense paid out without a return for the future. However, each mortgage
payment is an investment that builds equity by reducing the principle balance
of the initial home loan. In the long run, buying a home is a better value.
Sure, the rate of return on the stock market is 6% and return on your home is
likely to be .2%, but the alternative to a mortgage is not investing in the stock
market, it’s paying rent and that .2% return looks a lot better than the
$26,205 I’ve paid in rent over the last three years.
Before you make your next housing decision, calculate how
long you’re likely to stay in that location and how much you would likely pay
in rent allowing for a 5% increase or so annually. Then calculate how much it
would cost to buy a home. Be sure to include the cost of insurance, $1,000
annually for maintenance and repairs, interest on your mortgage, closing costs,
etc. Then calculate the equity you’ll build in your home by factoring in a 1%
annual appreciation (this is on the high end) and your monthly mortgage
payments. Be sure to also consider the nonfinancial costs and benefits of
renting vs. buying, but you may be surprised to find that buying still wins.