Should You Rent or Buy a Place to Live
No question has been asked more often over my decades of helping people with money, credit, and debt issues than is it is better to rent or buy.
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The best answer to that question is yes because arguments can be made on both sides of that issue.
Ultimately the real questions should be if it is emotionally better to rent or buy or mathematically better to rent or buy.
Here is a typical example. Let’s say you rent a home near a major metropolitan area.
Home prices have been increasing dramatically over the past few years, and trying to afford to purchase a home is out of reach for many people.
Renting can make sense if you want to live in a specific area due to quality of life, schools, services, etc. And renting comes with a lot of advantages. For example, it is not your problem when things break or homeowners’ dues, taxes, or insurance needs to be paid.
But renters lose out on building equity in the property and coast along on the coattails of rising property values.
Rent prices have been rocketing up in the past few years, and so have home prices.
According to recent data, rent prices have increased significantly in areas like Miami, Phoenix, Las Vegas, Orlando, and San Diego.
For example, Miami has gone up about 40 percent. Nationally, rent for a single-family home increased 13 percent over the same period last year.
Home prices in the last year have risen dramatically in Atlanta, Austin, Charlotte, Dallas, Las Vegas, Miami, Orlando, Phoenix, Seattle, and San Diego. Nationally, home prices were up 21 percent in March compared to a year ago.
For people that purchased homes five or ten years ago, the cost of owning that home monthly is much less than trying to rent it.
But that exposes an issue we need to talk about. How long you live in a home after purchasing is an essential factor to consider. Buying a home is expensive. It takes some time to recoup those expenses if you sell the home.
In Austin, Texas, it now takes homebuyers almost six years in their homes before they can break even when selling it. Philadelphia, Los Angeles, Honolulu, Charlotte, and Atlanta are near that same amount of time.
You hear so much about mortgage rates rising, and they are a bit, but the sky is not falling. Mortgage rates are still very low. Lower now than they were before the 2008 housing collapse. It could be argued that mortgage rates were held artificially low after the housing collapse.
For example, when my wife and I purchased our first home in 1986, we had good credit and were lucky to get a 14 percent interest rate. Mortgage rates are low now; relax.
Fear of missing out on the lowest interest rates is not a reason to buy a home now if there is no reasonable expectation you will stay there for at least six years.
In Austin, Texas, a median-priced home buyer would lose $30,000 if they sold in three years instead of renting.
It would take eight years of homeownership in Austin to be ahead by $30,000 over renting.
Renting can feel uncertain. You never know when your landlord might stop renting the property or raise the rent. But homeownership is uncertain as well.
You never know when a job loss, divorce, or illness might make the mortgage unaffordable. But unfortunately, many people lose their homes each year through foreclosure or short sales.
For example, in 2020, there were 214,000 foreclosures, and that does not include transactions where people gave the home back to the lender and walked away.
Homeowners often justify purchasing the home because it is theirs. But is it?
As long as you have a mortgage, the home belongs to the lender. As long as you owe taxes, part of it belongs to the taxing authority. As long as you pay homeowners association dues, part of it belongs to the association. Those groups can initiate an action in most states to kick you out of your home over the money you owe them.
If you are a homeowner with equity in your property and get sued for any reason, you could lose your property. But if you are renting, that won’t happen.
Like many other money, credit, and debt issues, figuring out if renting instead of buying is better is complicated. However, there is more to it than just assuming homeownership is the Holy Grail.
I want to leave you with the following homework. Please take a few minutes to think about if it is better to feel like you own your own home now or use the savings of renting to save more for retirement and be rich when you are older.
There are good positions we could debate on both sides of that issue. But thinking about this will help you be more aware if you tend to make financial decisions with your emotional brain or your logical brain.
On my site at GetOutOfDebt.org I have a money personality test you can take to help determine how you make money decisions. You will find the link in the right-hand column of the site.
If you have a credit or debt question you’d like to ask me for free, drop by GetOutOfDebt.org and click the Ask a Question link in the top menu.
I’m always here to help you because I believe in you.
This is Steve Rhode, your Get Out of Debt Guy