Rent or Buy? - Island of Sanity

Island of Sanity

Personal Finance

Rent or Buy?

People often ask: Should I buy a house or rent an apartment? And as with many interesting questions, the answer is clear and simple: It depends.

(I was thinking that if one or the other was obviously always better, then the obviously bad choice wouldn't even exist because no one would do it. But on further thought, that doesn't follow. Cocaine exists even though it's an obviously bad choice. Etc.)

So let's consider the pros and cons of each:

Issue Rent Buy
You decide to move It is cheap and easy. You just move out and stop paying rent. (Worst case, you may have to pay the rent for the remainder of the lease. But this is usually way less then the costs you'll have selling a house.) You have to sell it. It may or may not be easy to get a buyer. You may have to sell it for less than you paid for it, maybe even for less than you still owe on the mortgage. Plus you have to pay a realtor to help you sell it, typically 6% or 7% of the sale price. (You can sell a house without a realtor, but that's difficult and a bunch of work.)
Maintenance If there are any problems with the property or applicances, it's the landlord's responsibility to fix it. If the plumbing leaks or the heat won't come on, you call the landlord and he fixes it and it doesn't cost you anything. (The landlord may not be good about getting things fixed. But it won't cost you anything.) Anything that needs fixing is your responsibility. If the plumbing leaks, you have to fix it yourself or call a plumber and pay him to fix it. Etc. When I was planning to buy my first house and I was adding up costs, I didn't consider this. The first time an applicance broke and had to be repaired, I was totally unprepared.
Outside work Outside maintenance is not your problem. The landlord has to worry about mowing the lawn and shoveling snow from the sidewalk and so on. (Exception: (If you rent a house -- as opposed to renting an apartment -- this usually is your problem.) These things are your problem. Either you have to do it yourself or you have to pay somebody to do it.
Styling You can't make changes to the property without the landlord's permission. Any changes that you do make belong to the landlord -- you can't take them with you when you move out. You can do pretty much whatever you want with it. You can paint it the colors you like, put down tile or carpet or whatever flooring you like, replace the kitchen cabinets, etc etc. While most changes will have to be left behind when you move out, they may increase the selling price and thus you'll get back at least some of your investment. (Yes, you will be limited by city building codes and zoning laws. But these usually don't interfere with anything you might want to do unless it's pretty drastic, like remove a wall or add a new wing. If you're in a historical district or are under an HOA, there are likely more serious restrictions. But still, less than what you'd have as a tenant in an apartment.
Investment value You will pay rent forever. Once you pay the rent for a month and that month is over, that money is gone forever. Eventually you will pay off the mortgage and from then on you can live there for free. (Well, you still have to pay the electric bill, but you have to pay that in an apartment, too. And you still have to pay property taxes.) Most Americans get 30 year loans, which seems like an awfully long time when you're in your 20s. But many manage to pay it off early. And it's a good investment for retirement. I'm planning to have my house paid off before I retire, so in retirement I can live rent free.
Inflation The amount of your rent goes up with inflation. The mortgage payment is (usually) fixed. So as your income goes up with inflation and maybe promotions, your mortgage becomes a smaller and smaller percentage of your income. (There are "variable rate mortgages". These were popular when inflation was high and interest rates were going up and down constantly. But now that interest rates have settled back down, you don't hear so much about variable rate mortgages.)
Moving in cost You usually have to pay one month in advance plus a security deposit that is typically about the same as a month's rent. You can often get "move in specials" where the first month is free so all you have to pay is the security deposit, or some variation that makes the initial cost affordable. You usually need a substantial down payment. Banks typically want you to put 20% down before they'll give you a mortgage. You can get certain government backed mortgages with only 5% down. But that's still a lot of money for many young people starting out. On top of the down payment there are all sorts of "closing costs" that you have to pay to get a mortgage, title insurance and prepaid property taxes and bank fees and whatever.

A few years ago I read a nonsense comparison that I'll repeat here just to point out that it's nonsense: If you buy a house, it will usually be bigger than an apartment, so you'll need more furniture and it will cost more to heat it. Well, yes, if you move from a 500 square foot efficiency apartment to a 3000 square foot house, you'll need more furniture to fill the place. But that's not a comparison of renting versus buying. That's a comparison of the cost of a small living space versus the cost of a large living space. If you don't need a big house ... don't buy one. Buy a small house. You'd have the same problem if you moved from a small one-bedroom apartment to a big four-bedroom apartment. If you get a good deal on a big house but you don't have the money right now to fill it with furniture, so what? So leave some rooms empty. If you were living in 1000 square feet and now you have 2000 square feet but only have enough furniture for half of it, you're no worse off than you were before. And when and if you need the extra space, you have it.

So is it better to rent or buy?

If you can't afford a down payment and closing costs, then you don't have much choice. You can't buy, so you have to rent.

If you think you might want to move within the next couple of years, it is almost always better to rent.

If you are moving to a new city, perhaps for a new job, or for whatever reason, I'd advise renting initially. Once you buy a house, you are committed for years. It's hard to shop for a house long distance. You don't know the city so you don't know what neighborhood you'll prefer long term. You may even decide that, whatever the reasons are that you moved to this city, it was a mistake. Maybe the new job doesn't work out. So I recommend that you keep your flexibility for a couple of years until things settle down and you learn the area.

If you are tight on money or have trouble managing your budget, it's usually a good idea to rent. When you rent, you have a fixed monthly payment with no surprises. In the short term, renting can be cheaper.

Otherwise, I'd generally advise you to buy. A mortgage is usually less than the rent on a comparable living space. And in the long run, eventually you will pay off the mortgage and the house will be yours with no further payments. That may seem far, far away but you'll get there.

© 2021 by Jay Johansen


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