It depends.
Ah, the age-old question: to buy or not to buy? People for generations have agonized over whether to buy a house for themselves or to rent somewhere. There is no universal right or wrong answer. However, there is very likely a right answer for you personally.
Something that is crucial to keep in mind: No matter where you live, you’re going to have to pay for housing. That’s just a fact of life. You may live in a town where renting is cheaper than buying, or vice versa – whichever is lower is your baseline cost of living. Let’s say you live in Phoenix, where average rent is $1,800 a month and the average mortgage payment is $2,100 a month based on current home prices. So your baseline cost of living if you want to live in Phoenix is $1,800 a month. This example does NOT mean that renting in Phoenix would be better than buying. It simply means that no matter what you do, you’ll need to spend at least $1,800 a month to live there.
Now let’s compare.
Buying is usually better for people that:
- Want to stay in the area and the home they live in for at least 5 years.
- Have saved up a down payment (3% minimum) on their potential home’s value but also have additional savings to use for home maintenance, repairs, and improvements after they buy the home.
- Are interested in building home equity over the long term as an asset. For example, using home equity to help provide you with extra money in retirement.
- Are willing to invest time and/or money to do the work needed to maintain their home. If your home’s water heater goes cold, or your A/C dies on a 105 degree day, it’s on you to fix it or pay someone that can.
- Are willing to manage neighborly relationships, because you’re stuck with the neighbors you have unless you move or they move. We’ve all heard horror stories about neighbor wars.
Owning your own home can be very rewarding and a good long-term strategy to add to your wealth. But your personal financial situation should be comfortable enough that you’re willing and able to afford owning, maintaining, repairing, and improving your home. Home ownership makes more sense for people that want to stay in one place for longer, because home values fluctuate over time. It’s far from ideal to want or need to move but being “upside down” on your own home because you can’t sell the home for as much as you owe on your mortgage.
Bottom line – home ownership is great for people that can afford it and are willing to pay for the unexpected costs that can pop up over the years.
Renting is usually better for people that:
- Like the flexibility of being able to live where they want to live, both the actual house or apartment and the part of town in which they live.
- Do not want the headache of dealing with things when they break in their home. For renters, that’s typically the responsibility of a landlord.
- Are not interested in, or overly concerned with, making changes or improvements to the home in which they live.
- Do not wish to use their savings on home ownership (maintenance, repairs, improvements, etc.).
Renting is best suited to those that seek flexibility in their living situation. Renting is not throwing money away, contrary to popular opinion. Renting is better for people that view owning a home as a liability, not an asset. People that don’t want to deal with a tree falling on their fence, or their roof leaking in the middle of the night, or their home’s value potentially impacted by a neighbor that thinks fluorescent orange is a reasonable home color (not saying it’s not though).
Bottom line – renting is best for those that want flexibility and lower stress compared to owning a home.
Renting or owning a home is a big decision, so don’t take it lightly. Give it lots of thoughts and make it a part of your financial plan!
For lots more on how to crush the personal finance game and find early retirement, make Firreo.com your financial advisor. We’ll help you out of your job and on your way to financial freedom!