Monday, March 06, 2006

More Rent or Buy

The arguement continues, is it better to rent or to buy your residence? A few of my neighbors and I had a lengthy discussion over dinner last week about this very topic. My one neighbor feels very strongly that it is better rent (yes, even though he did just buy a newly built house), while the rest of us were arguing on the side of buying a house. I have also recently read 2 articles on the subject as well. The first, Homeowners 73, Renters 2, was at The Motley Fool and the second, Selling the "Cult of Home Ownership" Short, was from The Housing Bubble Blog. The first article says that it is better to buy and the second is on the side of renting. This is a really tough topic as there are so many opinions and I think that emotions and ego play a big part in it. I say this because most people automatically feel that it is better own a is part of the American Dream after all. Many feel that renting is what people should do for a little while after college, until they "grow up" and buy a house. Is this always the way to go though? Not according to my neighbor, the second article above, and most of the commentors on that article. All this talk about renting may actually be starting to convert me.

David Bach states a few reasons in the first article why owning a home is better than renting. His main reason for owning a home is that it is cheaper than renting. Bach states "Assume you're renting a house for $1,500 a month. Now let's say you stay put for 30 years, during which the landlord increases the rent by 5% a year. Over those 30 years, you will hand over a total of nearly $1.2 million in rent payments -- and at the end, you'll have nothing to show for it except a bunch of cancelled checks. To add insult to injury, you'll now be paying $6,174 a month in rent!" If you bought a $200,000 home (totally unrealistic around here right now), then it would be worth over $850,000 at the end of 30 years (using the same 5% increase each year). Bach also points out that, since mortgage interest payments and property taxes are tax deductable, your monthly payment can be reduced by about 30% (less over time since you pay more interest in the beginning and then less over time). Houses also are eligible for tax free gains when sold (up to $250,000 if single, $500,000 if married). So, when you sell your home, you can just walk away with the appreciation. These are all benefits of owning a home, but I am not sure that it fully convinces me that it is necesarily better than renting. One thing that this article doesn't factor in, is how much you have actually paid for you home over that 30-year mortgage. Figuring in interest, that $200,000 house costs a lot more than that (I am not going to calculate anything, because I hate math, but it depends on the interest rate you an example, I believe my first house was bought for $180,000 with a 6%'ish interest rate and was going to cost in the ballpark of $500,000). That will certainly eat into those great returns that Bach is talking about.

In the other corner...there are those that feel renting is a better financial decision. My neighbor views owning a house as a lifestyle choice, not something to do because it is a sound financial decision. Let's compare the cost of renting and owning a house in our area right now. To rent a nice condo (an apartment would be even cheaper, but perhaps not as nice) you would probably pay under $1500 for a 2 bedroom, 2 bath condo. Our house is costing us about $2500 a month for a 4 bedroom, 3 bath house. With the house you then have added costs of lawnmowers, snowblowers, landscaping, etc. This all adds up very quickly and are expenses that you would generally not see when renting a condo (you may see them if renting a house though). The x-factor here, that I see, is if you have a family and need more bedrooms. Part of my neighbors arguement is that none of us have families yet, but we have these huge 4 bedroom houses that we just bought. Perhaps he is right, we would have been better off renting for a while and saving money. We could then take that extra money and invest it.

I would be interested to hear the opinions of our readers on this subject. Is it better to rent, buy, or is there no real answer. My personal opinion is that there is no definitive answer that is right in all situations, it all depends on a bunch of factors (area, money, family, how long are you staying there, etc.).


Anonymous Medicated Money said...

"it all depends on a bunch of factors (area, money, family, how long are you staying there, etc.)."

I think that this last statement hits the nail on the head. In comparing apples to apples, I think that home ownership will always beat renting. However, I think most situation cannot be compared on a apple to apple comparison. My personal experience is that in the best location of city to live (especially in a major city), the housing costs are significantly more than the ratio to renting in this same area. I know for us, even though it kills us to write a check for rent rather than a mortage, the amount we pay to rent in the location of the city we are in, is roughly 3-4 times less than what a mortage would be. We are willing to do this because of the location and lifestyle we have. I feel even though we may be paying someone else's mortage, we are saving money in other areas that are often over-looked in owning a home. I feel that this goes against the grain of many financial thoughts, howerver, we do this bc of:

-Closer to work (little more than a mile)
-Amenities of the neighborhood community
-Just the two of us in a 1800sf townhouse

Overall, general comparison of the two is very difficult to do, due to the many variables involved that you have stated.

3/06/2006 2:15 PM  
Blogger kassy said...

We are currently renting a house and would much prefer to own. In fact we are considering making a proposal to our landlord to buy this house. I would much rather be able to make changes, fix things etc without having to ask for an okay or wait for the landlord to do it.

3/06/2006 2:17 PM  
Anonymous LAMoneyGuy said...

The problem that I have with Bach is his oversimplification, and his attempt to turn this decision into a financial one only. It is not. As medicated money discussed, it is all about the "bunch of factors."

Bach also leaves a lot of important factors out of his article. Interest cost is a major one that you discussed, but also maintenance, upgrades, insurance, possibly HOA dues.

He then confuses correlation with causation at the end of his article by stating that homeowners are statistically more wealthy. Did the house cause the wealth? In many cases, sure, but not nearly all.

3/06/2006 3:04 PM  

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