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?