Should You Buy or Rent?
I always hear from people, “You should get married, have kids, and buy a house”, or “A house is the best investment you’ll ever make”, or “Why are you renting? You’re only throwing money down the drain. It is always better to buy a house.” Is it?… Is it always better to buy a house than to rent?
The answer is simply, not always.
There are many factors that should be taken into consideration before buying a house and peer pressure is not one of them. Owning a home can be emotionally gratifying, but that does not mean that it always makes financial sense.
There are many pros and cons of buying vs. renting including flexibility, job security, down payments, utilities, freedom, control, maintenance, tax benefits, etc., but we’re only going to concentrate on the financial aspect of it. Does it make financial sense to buy or rent?
How To Know Whether To Buy or Rent
You’ve probably already weighed the pros and cons of buying vs. renting, but how do you know which makes more financial sense? It really all depends on where you live or want to live.
The housing market is different in every city and/or state and the only way to find out which one makes more sense is to do some calculations.
One way is to find out the cost of renting and the cost of owning a home in your area and calculate the Price-to-Rent Ratio or P/R ratio. To calculate the P/R ratio you divide the price of the home you’re interested in by the annual rent of a similar home.
For example, if you find a house selling for $250,000 and a similar house renting for $1,000 a month ($12,000 a year), the P/R ratio would be 20.8.
Most experts agree that when you have a P/R ratio of under 15 it is better to buy; and when the P/R ratio is over 20 it is better to rent; P/R ratios between 15 and 20 almost cancel each other out and you should really look at the numbers before deciding.
Another great tool you can use is the New York Times rent or buy calculator. There you can plug in the approximate numbers of home ownership and it will tell you if it’s better to rent – approximately. See screenshot of the calculator below.
There’s a lot more values you can enter into the calculator, such as taxes, closing costs, maintenance and fees, etc. I just couldn’t fit it all into one screenshot.
If you are not sure whether it makes sense to buy or not, play around with the calculator so you can have a better idea of where you stand.
We’re planning to buy a house someday, but our rent is so cheap right now that it doesn’t make sense for us to buy just yet. Maybe next year or the year after that, we’ll see. In the mean time we’ll continue to save some money.
That being said, there’s is definitely an emotional and psychological factor of buying a house which should not be taken for granted. But emotions have gotten a lot of people into financial problems. A house is a really big investment with a real risk so before you sign that paper make sure the numbers work in your favor.
Do you think it is always better to buy than to rent?
Hey Aldo,
I think it really depends on the area that you live in and the prices of the homes. I think I saw on another blog someone using that calculator and it seemed to skew towards buying from my perception. If you are planning on moving in a fairly short time frame, then the closing costs are a killer on both sides of the transaction. I think for a longer-term buying is the answer (of course, depending on comparable rentals), but short term should be for renting.
The PR ratio is interesting, it looks like when I purchased my house compared to rentals I could find at the time, I am looking at a PR ratio of 8.9.
The decision whether to buy or rent is definitely location dependent and you make a good point about buying if you’re planning on staying somewhere for a long time. The costs of buying a house are usually offset after 5 to 7 years. If you’re planning on moving before that time, you’re better off renting.
It really depends on your personal situation. For us, buying is not in the cards anytime soon for multiple reasons. We’re focused on paying back our student loans, and would rather focus on that than saving for a down payment. We also want the flexibility to relocate, as we don’t know where we might end up due to my boyfriend’s job. I have read some interesting discussions as to whether or not homes actually make decent *investments,* but I think most people buy them to feel secure and rooted (for emotional reasons, as you said).
We’re also not sure where we want to live for the next 5-7 years so until we figure that out, we’re going to keep renting.
I know many people who always say that buying is always better, but that just isn’t true. That are a lot of costs associated with buying a house, and renting is not “flushing money down the drain.” People don’t take into account the amount that goes towards interest payments, closing costs, costs when selling. It does depend on your area…here in NYC area, housing is expensive (renting and buying). It also doesn’t make sense to buy if you are not set in your career or don’t know if you’ll be staying…buying a house kind of locks you down while renting gives you more flexibility.
You’re right Andrew, those costs do add up. There are also those expenses like utilities and maintenance that people take for granted. Since I rent, I don’t ever have to shovel snow, or mow the lawn.
It totally depends. I live in LA and it seems so far out of reach it’s not even funny. Rent is expensive enough. And being a freelancer, it makes me very nervous to be committed to something like a mortgage.
I hear you, not having a steady income is a bit scary if you have a mortgage. You’re doing pretty good with the ukulele by the way, keep it up.
We sold our house last year and started renting. On the surface it seems exactly the same – we are paying the same in rent that we paid toward our mortgage. We did pay a couple hundred extra on our mortgage each month so we could pay it down enough to sell it. We save so much more money now that we’re renting, but that’s because we bought the wrong house for us in the suburbs. Now we rent a smaller house minutes from work. We do plan to buy again, but not for a couple of more years and not unless we are 100% sure we are going to stay in the house for many years.
That’s another good point. A lot of people get more house than they really need because they feel is not worth it to buy a small house. Go big or go home?
I used to be a firm believer in home ownership, but now, every home repair we have to make causes me to love renting more. 🙂
Love that NYT rent/buy calculator! We did decide to buy our house two years ago, but, as you advise, it wasn’t an emotionally-based decision. We bought it with the intention of turning it into a rental property in a few years, so we really viewed the purchase as an investment. Bonus is that we do enjoy the house and we like living in it! But, I completely agree with you that buying is not always best.
People attach too much importance to ‘throwing away money on rent’ as opposed to putting it towards a house, but what they fail to realize is that so much of your mortgage payment just goes to interest at the beginning. On top of that you have closing costs as you say, property taxes and maintenance costs. Maintenance costs are often overlooked, underestimated or foregone (pay me now or pay me later). Never mind the inconvenience of maintenance work. I’m a big supporter of do the math and consider the other non-financial implications.
It will almost always be cheaper to buy than rent. Whether it is a car or a home.
But renting gives you the flexibility to follow your career wherever it takes you. If you get a job 20 miles away, move and save gas. Across the country, move and re-rent.
As far as the getting married part… I have always heard you are better off finding a woman you hate, and then give buy a house.
I am actually working on an article that covers this exact topic!
There is no “one right answer” for everyone. Each situation is different.
Such a personal topic that varies on so many fronts as home prices and rental rates vary so much from city to city. Even with handy tools and equations that try and make the decision easier by presenting hard numbers that show whether buying or selling makes more financial sense is not enough. The way I see it, buy a house if you want to and are looking for a place to live. The way my parents did about 40 years ago. They wanted a house, they liked the neighborhood, they liked the schools, they bought. It wasn’t an “investment” it was a place to live. They did not care about interest rates going up or down, waiting for the market to drop, flip, etc. etc. These are all modern concepts that came about in the last decade. My parents and millions other bought their house with double digit interest rates of around 18%. Today we are “smarter.” We buy, flip, lock in low interest rates monitor what the Fed will say/do. Forget all that noise. You want a house and can afford it, buy it. Plain and simple. It’s a home, a place to live. The investment you get out of it in 10, 20, 30 or 40 years is simply the gravy.