For decades and in many if not most countries, purchasing a home was a standard measure of financial success, even a mark of adulthood. However, the idea is often questioned in recent years, especially after the US housing crisis back in 2008.
Many people nowadays are still thinking that buying a house is a good—if not the most important— investment, many others will argue that it’s a dumb waste of money, and renting is the way to go.
Here, we will discuss the pros and cons of each, and hopefully by the end of this, you’ll have a clearer picture of whether buying or renting a house is the better option for you.
The Both Sides of The Argument
The first thing we should address is the fact that both buying and renting a house aren’t totally good or bad. Both have their own pros and cons, so we should avoid taking things to the extremes.
Here, let us take a look at some of the solid arguments on both sides as our starting point, before we can discuss the actual pros and cons:
The important arguments in favor of buying a house are:
- It’s always better to own something in the end rather than “throwing money” on rent. When you finally pay off the home, it’s yours and you can liquidate this asset if necessary
- In the long run, you’ll earn a return on investment or at least break even. This is if the home appreciates more than what you’ve paid in total (mortgage, taxes, maintenance, interest)
- Tax credits can significantly cut the costs of home ownership
On the other hand, here are some solid arguments for renting a house:
- The interest and taxes in buying a house can be significant, even more than the cost of renting
- If you don’t spend on down payment, monthly payments, interest, insurance, and taxes, you can invest the money elsewhere and earn more
- Renting is buying a place to live, it’s no throwing money away
- The costs for home repairs, maintenance, remodelling, and others can be very significant
As you can see, both sides have their own valid arguments, and we can’t say that there’s a wrong side. Individual factors and reasons will ultimately decide the better choice for the said person, and below, we will discuss these factors.
Individual Considerations: Buying VS Renting a Property
One of the main arguments in favor of renting is about opportunity cost: since you don’t have to pay loan interest, taxes, down payment, and other costs associated with buying a house, you can use this money for other investments with higher potential returns.
However, these opportunities will vary with different individuals, and the overall living costs will also vary. Thus, here are some important individual considerations regarding this:
- The average housing cost of your area. Renting is often the preferable option when houses are simply not affordable. However, this will vary from area to area. Careful calculations must be made before deciding whether buying or renting is more affordable.
- How long are you planning to stay in the area. Whether you are buying or selling the house, there will always be closing costs, which can be significant. Mortgages are also usually structured that you pay significantly more interest in the first years. So, in general, buying is only a better option if you plan to stay in the house for at least five years. Otherwise, renting is generally less costly.
- The opportunity cost of your down payment. Is there any good opportunity to invest your down payment money elsewhere? What are the odds of getting better returns compared to the house’s resale value in the same time frame. For example, if you use the money to start a business, will you make more money than selling the house in 10 years? This can be difficult to calculate as there can be unpredictable variables.
- Opportunity cost of monthly payments, insurance, taxes. Similarly, is there any better opportunity if you invest this money elsewhere? For example, if you invest the monthly payment in the stock market, what are the odds of a higher return?
- House appreciation vs inflation. Contrary to popular believe, real estate doesn’t always outperform inflation. There are, however, locations where it is still the case. If real estate prices significantly outpace inflations in your country/area, buying a house is definitely a good long-term choice. Don’t forget to include interests and taxes in your calculation here.
List of Homeownership Expenses
Below, we will list most of the important home-ownership expenses to especially help you in calculating opportunity costs. Remember, however, that there will only be an opportunity cost when there’s a viable opportunity. You have to research your investment options according to your area.
- Mortgage fees. Upfront fees that are charged by lenders to process a new loan.
- Closing costs. Fees like property taxes, interest, escrow fees, charged when buying or selling a house
- Realtor and lawyer fees
In general, these one-time costs are valued at 5-12% of your home value.
Ongoing costs (can be monthly or annually depending on your location):
- Mortgage interests
- Property taxes
- Insurance (homeowner’s insurance, mortgage insurance, etc.)
- Utility costs (electricity, gas, water, etc.)
- HOA fees
- Maintenance, repairs, remodelling costs
Calculate these costs carefully and compare it to the opportunity costs. You can ask the help of a realtor or even a financial planner to help with a more detailed and accurate calculation. Knowing your numbers should be your number one reason in making your choice.
In the end, it will depend on your individual situations and available opportunities. There are cases where renting is the smarter options, and there are also cases when buying is the better choice. It’s important not to alienate both options, be open-minded, and carefully do the necessary calculations.
Don’t stretch your finances to buy a house just for the illusion of ownership. On the other hand, don’t close your eyes if buying a house is actually a viable investment in your area.