Buy or Rent?
By Steve Gillman - 2006
To buy or to rent? It all depends on your circumstances, and
on the real estate market where you are. I once sold a home for
a young couple who owed as much as the sales price. They had
to take money from savings just to pay the closing costs and
sales commission. I am sure they wish they had rented for the
couple years they lived there.
That story brings up the first thing to consider when comparing
buying versus renting: the time you will be there. The process
of buying and later selling a home will usually cost about 10%
or more of the value of the home. In other words, if the home
only went up in value 10% or so in the year or two you lived
there, you won't be gaining anything in the end (equity gain
from principal pay-down is very little in the first years). Generally
you are better off renting if you'll be in a town for less than
a few years.
What about faster appreciation? It happens, but have you done
some serious homework? If not, assuming appreciation will be
more than the general rate of inflation is just gambling. In
the example above, the sellers sold for the same price they bought
for two years earlier - and this was in a decent and growing
area. You can't count on fast appreciation just because it has
been that way recently.
Buy or Rent - The Cost Comparison
Comparing buying versus renting, you have to take into account
that in many places it cost much more to buy. For example, in
Tucson, Arizona a small home costs $200,000 or more. The mortgage
payment, taxes, insurance and maintenance will usually add up
to about $1,600 per month. You can rent the same size home for
What does this mean? Real estate fanatics will tell you that
you are at least buying something for your money, and that renting
is throwing your money away. Of course more than $1,000 of your
payment will be going towards interest alone in this example.
That's not buying you anything.
Consider this: What if you could afford the $1600 per month,
but instead you rented for $800 and put the other $800 into a
decent safe investment that made you 5%? In three years you would
have over $30,000 in this account. Assuming that the home appreciated
at 6% per year ( it has been more like 25% per year recently,
but that can't continue, and assuming so is not planning, but
gambling), it would be worth $231,000. But the costs of initially
buying it and then selling it would likely be around $13,800
(2% buying and 6% selling), leaving you with a gain of about
19,000 once we include your principal pay-down.
Did you get that? You would be at least $11,000 better off
if you rented and banked the difference. Of course every market
is different. You have to do the math, comparing the total costs
of owning versus renting, and then making safe assumptions about
the rate of appreciation for homes.
In the end, if you will definitely be in one place for a long
time to come, it will most likely be better to buy than to rent.
Even in the last example, buying becomes a better bet after about
four or five years. Another factor to consider is that if you
get a fixed rate mortgage, your payment will never change. Landlords
won't offer you that on your rent payment.
Look at the time you'll be there, the comparison of total
monthly costs, whether rents are going up fast, and whether you
have good reason to believe home prices will be going up fast.
Look also at all the personal factors. Do you want to be responsible
for the maintenance, yard work and unpredictability of ownership
problems? To buy or to rent? In the end, you have to work this
one out by yourself.
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