Yesterday I found a calculator for knowing when it is best to buy vs rent financially. Note for understanding the calculator: The price amount in the section for “Advantage of Owning a Home vs Renting One”
- If price is in black, then that is how much more money you would have from buying a home.
- If it is the red, then that is how much money you would lose from living in a home.
Pros and Cons of Buying
- The Feel of Ownership: There is something special about owning something yourself. There is a reason why people who own their own homes take better care of them than those who rent. Also, by being the owner you get complete creative control of your house. You get to decorate it, design it, and make it just the way you want it.
- Build Equity: Some notes on this: House prices go up at the same rate of inflation so it isn’t the best investment.Only 1/3 of homeowners take the mortgage interest deduction. Also, buying and selling a house can have a lot of fees. All this to say though that if you are going to stay put for quite a bit of time, you don’t want to be paying someone else money to live, instead you could be “paying yourself” to have a roof over you head.
- DIY Project: If you are one of those people who enjoy fixing things up, painting things, and all of the like then owning your own home gives you this opportunity.
- Stuck in a Mortgage: If you want to move, but cannot sell your house, you may be stuck. Huge lost opportunity cost of being able to do what you want right there.
- Doesn’t Appreciate any faster than Inflation: Even when you sell your house for more money 15 years after you bought it, chances are that you cannot buy anything more with that extra cash you “made” than you could have 15 years ago.
- DIY Projects: Instead of being able to do things you really want to do, you are stuck with a list of chores. Fix that, clean this, decorate that… The list goes on.
Pros and Cons of Renting
- Are Not Tied Down: It is so much easier to move if you are just renting. In our changing society where people move more often as life changes, this is a huge advantage of renting. In buying and selling homes, you lose a lot of money to the fees. As stated earlier, if you want to move but cannot sell your house, you may be out of luck.
- No Maintenance: It is nice not having to spend the time calling the repair man or fixing things in your own house. I know living at college has gotten me used to that. Also, this means you will not ever have any other incidental costs.
- Lower Cost Upfront: For people who do not have the money for a down payment, renting is really the way to go. Also, most people’s entire savings is rapped up in their home equity. This is not diversification and the asset of a house does not appreciate any faster than inflation.
- May Not Have that Same Ownership Feel: When you live in an apartment you do not get as many decisions on how the house should be. It just isn’t the same as the ideal we have in the USA of home ownership.
- You are Subject to a Landlord’s Decision: If one day the landlord decides to raise prices or change something, baring you didn’t have a contract that forbids, you may end up in a place that is not where you want to be anymore.
- Lower Cost Upfront: Though I said this was a pro, it is also a con. Even though you may save money from renting, that money may just be wasted and 10 years from now, instead of having been forced to build equity in your house, you will have no savings and be in debt. This means that renting takes more discipline to be financially stable, especially if you are not saving up for a down payment on a house.