Buy or rent? The decision is really a matter of preference.
Let me say upfront that I have a bias for home ownership. That’s my own personal preference; however, there are certain situations when renting may be a better choice. At the end of the day, the decision to buy, or not to buy, will depend on your needs, your preferences, your future outlook and the weight you attribute to the individual benefits. The question is which arrangement is better for your peace of mind and your pocketbook, and how does it fit in with your future plans.
Here are some of the considerations:
For starters, we know that it costs money to live somewhere, whether we are renting or paying a mortgage.
The advantage with buying a home is that the mortgage will be paid off at some point. If you no longer have a mortgage by the time you are 50 years of age, you have potentially 30 to 50 years to live mortgage free.
There are compelling arguments for renting as well.
Advocates of this approach point to lower expenses such as: No property taxes, no maintenance, no large capital expenditures like updating windows, lower insurance costs, no interest payments on a mortgage loan, and no interest rate hike risk.
It makes sense to lower your cost of living if you use the savings to grow your investments.
But what if you use your savings to go on a nice vacation, or buy a better car, or treat yourself to products you don’t need? What if you spend your savings and end up not investing a penny? In that case, maybe purchasing a house to live in would have been a better option for you even if the costs were higher. At least you would have been building equity. In this scenario, a house can be seen as a forced or an automatic savings vehicle.
Another consideration is your lifestyle.
If you are on the road frequently for instance, owning a home might be a hassle more than a benefit, with the worry of your home being un-occupied for most of time. In this case peace of mind considerations could be top-of-mind for you.
Choosing to buy versus renting can also depend on your assessment of the housing market and how long you expect to live where you are.
If you expect to live where you are for the very long term, it probably makes sense to buy since chances are you’ll be mortgage free at some point. Even if the housing market suffers a drop, the probability is that you’ll be living in a mortgage-free home that costs less than renting a place. I can say from my experience that owning a home mortgage-free is less expensive than renting. In my previous home, I had calculated all house-related expenses and utilities for one year, including maintenance and lawn cutting, and my cost was $700 per month. If I had been renting that same home, utilities including the rent, it would have cost me over $1,600 per month. That means a saving of $900 per month that can be put to work in investments.
If you don’t see yourself in the same location long term, or if you really don’t know how long you’ll stay, you may want to rent if you believe there is a high risk that the housing market will suffer a serious correction.
For example, one person I interviewed prefers to rent. There are several reasons for his choice, one of which that he doesn’t know how long he’ll be where he is. He wants to keep his options open. He wants to be mobile. Mobility has a lot of value for him. In fact, this person recently moved away to another city. He prefers to consistently add savings to his stock market investment accounts instead of putting his money in a home that he may need to sell at a loss on a moment’s notice.
Can Buying Your Home Be Considered An Investment?
There are people who believe the purchase of your home is not an investment. I disagree. In my opinion, anything that has a reasonable potential of providing value or of increasing in value is an investment. My first house is an excellent example of increased value over time and mortgage debt pay down. I paid 78K and sold it 13 years later for 150K. My mortgage balance was less than 5K, resulting in cash in my pocket of 145K. When I bought the house I had put in approximately 20K as a down payment. This means that I increased the value of my original investment 7.25 times. If I had been renting all that time, assuming average monthly rent of $800 per month for 13 years, I would have given away 125K. As a renter, not only would I be 125K out of pocket, I would also have missed out on the 145K equity I captured at the time of the sale of the house. That looks like an investment to me.
An argument that comes up is that owning a home is not a good investment since the housing market can crash.
This is true, we don’t know if or when there will be a housing crash, and if there is one, we don’t know what the extent of it might be, and how long it might take to bounce back. But then, we also don't know with 100% certainty what the future holds for other investments. We only know what our expectations are and what we estimate the probabilities to be.
In addition, there is the idea that housing only appreciates 1-2% per year in real dollars because of the inflation factor.
But here’s another way to look at it. Even if the value of a house only increases 1-2% in inflation-adjusted real dollars, return on investment isn’t calculated based on the total value of the house, it is calculated based on the investment in it, i.e. the down payment. This will be the case for many of us because we do not have the means to pay cash for our home.
Here is a conservative example to illustrate return on investment:
If you pay 300K for a house and your down payment is 15K (5% of 300K) and you sell the house 10 years later for 390K, you will benefit from an increase of 90K over and above your purchase price. This means that your original investment of 15K will have multiplied 6 times, giving you a gain in your pocket of 75K. Looking at it from an annual perspective, 75K over 10 years equals 7.5K per year on an original investment of 15K, meaning a 50% return per year. That looks like a good investment to me. If you factor in the fact that the capital gain on your principle residence is tax free (in Canada), it makes the investment that much better. Of course you’ll be putting in more money than your original investment into your house, such as improvements and repairs. To me, that’s a small price to pay for a 50% annual return. Note that I am not accounting for the mortgage payments because if we weren’t buying the house, we would be renting somewhere.
Obviously, we can lose money with a house, or any real estate, depending on circumstances such as market downturns, and personal life events. But then, no investment is ever really guaranteed, even the safest investments can be at risk if there is a catastrophe.
The answer to the question “Is it better to buy or to rent?” is that it really depends.
It depends on what it is that YOU want, it depends on your circumstances, your preferences, the lifestyle that you favor, the quality of life that you seek, how long you expect you’ll live where you are now. It depends if you see your home as an investment that you want to live in mortgage-free at some point, or perhaps keep it as a rental to supplement your income later on. It depends if the timing is right for you to buy, for example if the economic situation is favorable or not.
When all is said and done, it’s a personal decision.
I mentioned at the beginning of this post that I have a personal bias for home ownership: that’s because I consider my home as both a financial asset (for mortgage-free ownership and increasing value potential over time) and an emotional asset (for quality of life). But if I was planning on living in the same location for only a very short time, I would consider buying only if I believed the economic situation was such that increasing values were expected. That said, I would make my decision knowing that predicting the future with a 100% certainty is impossible, which is why the long term view is often the most favorable option because it evens out the short term fluctuations.
I hope you found this post useful.
About this blog
This is a blog about investing for beginners. You can count on quality information
Yvanne wrote a 2-part book series about investing for beginners. She is an investor with an entrepreneurial character and a creative spirit. In the context of her career, she was trained as an analyst, and later as a manager. Find out more here.