Should I buy or should I rent?
Photo by Ted Dawson
Ah yes, the time honored question. Should I buy or should I rent? If only it were that easy. A lot goes into that question, and a lot of it is long term, down the pike kinda thought.
But some of it is right in front of you.
The first question is...do you want to own a house or be a tenant? When you own, you have a type of freedom that renters don’t have. You can get a dog and paint the walls. You can plant your own garden and pick whatever type of towel rack you want. You can invest in energy efficient improvements and even change the layout. The list goes on and on. These are all choices that you get to make when you own.
Independence and Security
Many people report a sense of independence when they own. Especially, those who are first time buyers. Your entire life, you have had to ask if it’s ok to do something with your living space. That changes when you own. You don’t have to ask anyone (but if you live with at least one other person, it’s probably a good idea to at least talk about what’s happening with your house.)
Additionally, many renters feel a greater sense of security when they buy a house. A landlord can choose to raise rent, undergo renovations, or even sell the property. And there’s that a tenant can do about it, so long as the landlord is following the terms of the lease.
Sure, it can seem as if your landlord loves you. Maybe you even have a slightly below market rent because you’ve been there so long and you have a great relationship. But at the end of the day, as soon as the landlord decides to sell, you may be looking at finding a new place to live.
As long as you pay your mortgage and taxes, when you own real estate you can stay there as long as you want.
Which brings me to what I know you’re really reading this for. Does it make sense financially to buy a house, or is it better to rent?
Over time, financially, it almost always makes better financial sense to own than to rent. There are a few reasons for that.
Rent Check Vs. Mortgage Check
One is that if you have a fixed rate mortgage, your monthly payments will only go up as property taxes and insurance go up. In Vermont, that means that if your town votes to increase the budget, your tax bill is going to go up. So, if your property taxes went up $350, then you’d have to pay an extra $30 each month.
Many landlords increase by 2% to 3% (or more) each year anyway. But what happens if your landlord realizes that they could charge 10% more and still keep tenants? Your $1000 monthly rent just went up by $100. And what are you going to do about it? Well, you’re either going to pay it, or you’re going to move out.
And guess what? If the place your renting should really be renting for could fetch $1100, then you’re going to have to pay that somewhere else. Either that, or you’re going to move to a place that’s not as nice, or not as desirable a location for you.
But when you own, no one’s going to unexpectedly jack the rent on you.
Maintenance, Repairs, Utilities
I’ll admit, one of the most awesome things about renting is that you’re not responsible for most repairs and maintenance, or for some utilities. It’s kind of nice to have someone else cover that for you.
But, ready for a dirty little secret? Most maintenance isn’t really that hard. And you can usually plan for the big things that come up (See blog post: How long do things last, and how much do they cost?)
You can learn to fix a toilet, change an outlet, repair handrails, and all sorts of light carpentry. And honestly, if you really don’t want to, you don’t have to. You can hire someone to bang those things out. There aren’t too many things in a house that really need to be repaired at three in the morning. (See blog post: repairs that you have to make at three in the morning, and how to avoid having to do them by planning ahead)
Get the furnace checked, pump the septic tank, keep an eye on the roof, hit peeling paint when it comes up. Those are normal maintenance items that you get to perform. And in return, you get...
Yeah, this is the fun part. You bought your house, and you’ve kept it up. Home values go up and down in cycles, but over the long term, residential real estate has appreciated at around 3% annually. Which means if you just kind of keep your house in decent shape, your $200,000 house is likely to be worth around $268,000 in ten years. So, in appreciation alone, you’d have an additional $68,000 in net worth.
If, instead, you had rented for those ten years, your real estate net worth would still be, hmmm, let’s do the math here...zero.
And yes, I know that you could have taken the difference in monthly payment, maintenance, repairs, etc. and put it in a savings account or invested in a mutual fund. But would you? Really? Really??
Mortgage Pay Down
You would also be paying down your mortgage each month. At first, just a teensy part goes to paying down principal, but those decreases add up. In those ten years, your original $200,000 mortgage would be down to $162,000 (assuming a 30 year loan at 5% interest).
Which means you just tacked on another $38,000 in net worth.
Which also means that in ten years, your net worth increased by over $100,000. While it’s not all about money and net worth, all things equal, most people would prefer to have an extra $100,000.
If you can, it almost always makes financial sense to buy instead of renting. You get independence and security. You can account for the hassle of ownership by following a regular maintenance and repair schedule, or hiring someone to do it for you. Over time, market appreciation and mortgage pay down will add to your net worth.