Whether to Rent or Buy: Part 1

Friends of mine (a couple I’ll call The Renters) had been renting the same home for more than seven years. They could afford to buy but chose to rent. The thinking being that renting simplifies their lives. How so? No financial responsibility for repairs, maintenance, or property taxes. No tying up a big chunk of dough for the down payment, nor paying five or six figure sums of mortgage related interest over the twenty to thirty year mortgage term.

Charged with the singular responsibility of sending payment once a month to the owner, not obligated to sink huge dollars into a home, The Renters happily invested their substantial liquid assets in stocks, bonds, and ETFs, and watched their wealth grow, on average, at about 6%/year.

Then their thinking changed. The Owner had delivered a formal notice to vacate. This despite giving his word as recently as six months ago that The Renters were welcome to stay in the house indefinitely. Apparently, owing to an overheated local real estate market, The Owner wanted to cash out while the cash was plentiful.

The Renters were disheartened by Owner’s dishonesty. The more pressing issue, however, was the hard fact that they had a meagre two months to find a new place to live.

Jane The Renter. “We should consider buying. I really don’t like that we can be kicked out of our home at any time.”

George The Renter. “Maybe. But not now. We have only two months to find a place. I don’t want to rush into a huge purchase. And the real estate market has to top out soon.”

Jane The Renter. “Who knows where the top is? Has San Francisco stopped climbing? New York? Vancouver? They’re all insanely priced, going up year after year. Let’s at least consider buying now. Because who knows if prices will continue marching higher or pull back? It’s all a guessing game.”


The Process

Does it make better financial sense to buy or rent your home? There’s no clear cut, one size fits all answer. Instead, there are a whole lot of factors that come into play, depending on your particular circumstances.

But before taking a look see at some of the nuts and bolts factors, lets talk about the most powerful influencer of all: Emotions. How we FEEL about a house, our gut instinct, is what underlies most buying decisions.

Rational considerations, money issues, these tend to fall by the proverbial wayside. Especially when Buyers find their DREAM HOME and claim to ‘FALL IN LOVE’. My advice: don’t fall in love. Ever. With a house. Because it’s not really love, and it’s dangerous to your health.

Sure, maybe I say this because I’m a guy and emotions are buried seven layers below the surface, strategically placed, and difficult to access. Regardless, when making the call to spend THAT KIND OF MONEY, I only want to deal with cold, hard facts.

I want to know all the realities of home ownership, especially all my costs not only in buying the house but, just as importantly, the cost to maintain it. How much will I sink into these four walls every year? Will I stress about mortgage payments? What’s the annual property tax? Will I have to cut spending if I buy this house?

Whatever the issues are, I want to think about them thoroughly, and carefully cost them out, well BEFORE letting anything hinting of excitement sneak its way to the surface.


Save, Save, SAVE!

Despite popular opinion, paying monthly rent is no more throwing money away than is paying mortgage interest and property taxes.

That said, owners seem to have an advantage in that mortgage payments do lead to whittling away the balance owing, and correspondingly increasing your equity (i.e., your outright ownership and financial interest) in the home. More equity translates to less debt that results in more savings, assuming the home’s value remains constant or rises.

Buy a home in your 20s or 30s with a 20, 25, or 30 year mortgage, and by the time you approach retirement, the mortgage is paid off and you’re sitting pretty in the form of a valuable asset that is yours, all yours, goodbye and good riddance to the bank.

Those in favor of renting might argue, validly, that money otherwise applied toward paying a mortgage is invested. And investments will grow at a pace equal to, or greater than, the home’s value.

Fair enough. Certainly with a well thought out investment plan, in 20 or 30 years, The Renters assets may be similar to, or even greater than, a homeowners. Still, being human, we may know what’s good for our long-term health but not necessarily take steps to make our self healthy. Meaning, will The Renters consistently contribute money to their investment account or will they be tempted to use that money to splurge on winter vacation down south each year when they’re desperate to escape cold weather?

The thing with home ownership is that you’re forced to save. Don’t pay the mortgage and you lose the home. That’s incentive to enough to make payments.


Up, Up and Away

When The Renters sold their home seven plus years ago and first started renting, they were paying $2,000/month. With the increase in home property prices, rents have also jumped, and they’re now paying close to $3,000/month for a four-bedroom house in a pleasant neighborhood.

Could rents go higher still? Yup! Conceivably, rents could rise every year even in areas with legislated rent controls (most rental control laws limit the percentage by which landlords may raise rent, but don’t prohibit annual rent increases; also, rent control laws are not written in stone – they may be watered down or disappear one day depending on the political flavor of the moment).

And the more rents rise, the less discretionary income available to The Renters, the more rent payments negatively impact their standard of living, and the more it makes sense to become a homeowner.

In buying a home, The Renters would know their exact mortgage payments for the duration of the mortgage term. If property prices continue to rise, well, The Renters – um, now presumably morphed into Homeowners – benefit from having secured their home for as long as they like; not having to worry about rising rents or being tossed out; and knowing that their home equity increases whenever property values increase.

Still, should they buy now? While I seem to have temporarily misplaced my crystal ball, I will offer that hot markets don’t stay hot forever. When the market will cool, that’s anyone’s guess. But if The Renters can be patient, then they’re more likely to avoid overpaying and rushing into a meaningful decision that is best made cautiously. Even if it ends up being their dream home.

I’ll have more to say on this topic in Part 2, to be posted in a few days.

In the meantime, if you’re in the mood to plug in some numbers and get a good feel as to the merits of buying or renting in your neighborhood, check out the NY Times calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html.