Rent vs Buy
Yesterday we had a good discussion in the comments of a post on the old buy vs rent debate. Here is my quick analysis of it:
Buy
+Mortgage
+Mortgage Insurance
+Taxes
+Home Insurance (Houses Only)
+Association Dues (-utility benefits)
+Buy/Sell Costs (Agent + Mort Fees)
+Maintenance/Repairs
-Tax Deductions
—————-
=Cost of Home Ownership
For the “Cost of Home Ownership” defined above you get in return equity (from principal payments), all profits/losses on the value of the home (over the long-term real estate values increase at a rate equal to wage increases - which edge just slightly higher than inflation due to productivity gains), and a place to live.
Rent
+Rent
—————-
=Cost of Renting
For the “Cost of Renting” you only get a place to live.
So the question is: Does the equity you develop + potential gain/loss on the value of your home worth the extra money you pay to buy vs. rent (difference between “Cost of Home Ownership” and “Cost of Renting”)?
In almost all cases I would say that it is not - especially when you factor in the tremendous risk you expose yourself to by leveraging several hundred thousand dollars on a single asset.
Of course this analysis completely ignores all of the soft benefits that come along with buying or renting. These should not be ignored, but I’m trying to avoid writing a book.
This absolutely assumes that you do something more useful than leave that money in a savings account though. The reason renting works for lots of people is that they usually live in a smaller rental space than the home they would purchase, AND they put that extra money into some type of long term growth investment.
Not to mention the fact that if you are renting - you are paying all of those fees that are included in the “homeowner” field, but you’re paying someone else to pay them for you.