When Is Renting Better Than Owning a Home?
How many times have you heard that renting is throwing money away and buying a house is an investment? How many legit financial professionals (not someone who is trying to sell you a house to earn a commission) have told you this? You probably don't take medical advice from your hair stylist, so you probably also shouldn't take financial advice from someone who doesn't spend a big part of their day, everyday balls deep in the finance world.
Be discerning. Question assumptions and conventional wisdom. Don't just assume that tax benefits benefit everyone. Run the numbers. Think for yourself.
Renting Isn't Throwing Away Money
When you rent, you aren't throwing your money away because you're getting something in return for paying. You are getting a roof over your head, protection from the elements, a lovely place for you to lay your head down at night.
Where have we gone wrong in our society when people believe that paying rent is throwing money away? Maybe that is a bigger existential question that can't be answered through a blog post, but I want us all to pause and realize how bonkers that logic is. Just because you don't gain any potential upside doesn't mean you aren't getting anything. You are getting what you pay for, no less and no more.
Your Home Is NOT an Investment
I'm sorry that I'm not sorry that I probably just harshed your mellow. But it's true. Your home isn't an investment. You win the housing game if you end up spending less money on buying a home versus renting a home, but it doesn't necessarily mean that you put in money and then made more, which is ultimately what good investing is.
Houses Are Not Liquid
Liquidity is jargon and it means how close an asset is to cold, hard cash. If an investment is liquid, it can be liquidated into cash easily. So even if your house goes up in value, the only way to access the value is to sell your house or borrow against it with a line of credit.
Owning A Home Is Expensive AF
You pay so much beyond the initial purchase price. Have you ever bought a car or gone with someone to buy a car? Remember the sticker price? Then do you remember all the bull shit that follows in the negotiation and how the sticker price is so much lower than what one actually pays for a car? Same shit with a house. There are buying costs, selling costs, property taxes, insurance, interest, maintenance, furniture and renovations. If you're curious about the actual, here is this super awesome/dorky workbook that I've built so you can figure out the true cost of homeownership.
If you plan to stay in your house forever, there's a pretty good chance that, yes, buying is definitely better than renting. Time is on your side in the long run as long as everything goes according as planned and prices go up. But the timing of buying and selling also has to be right. *Cough* Summer of 2008.
So the conventional wisdom isn't entirely flawed, but the problem with the simplification of "renting is throwing away money and buying is investing" is it leaves out the variable of time. For the folks who don't stay in their homes forever, the shorter time frame doesn't always result in a positive return on the investment.
When Is Renting Better Than Owning A Home?
There are a few scenarios where I can definitively say it's better to rent than to buy your home. Let's dig in.
If Buying a House Will Make You Cash Poor
If you have to spend all your savings on all the upfront costs like your downpayment, closing costs and moving expenses, don't do it. If you'll spend your emergency fund and you won't have much cash on hand, don't buy the damn house. You cannot afford it.
You need to have a good cash cushion if you have an emergency like if you or someone in your family gets sick or hurt or you have to throw down a bunch of money on a car repair or home repair. If you don't have that cash, you could be in a world of financial hurt trying to weather that storm. Seriously, don't do it. You need to save more money before buying that house.
If You Want Flexibility
Not having to commit is the other side of the same coin of flexibility. Renting gives you short-term flexibility that owning does not. If you don't know how long you plan to stay in the same city or state or country, then you shouldn't buy a house.
Even though you can rent your house (which is an entirely different argument because now we're getting into investment property), you still have a mortgage to pay and now you're a landlord. Which means you still have responsibilities that eat away at flexibility.
Most people think, "Well, I can just sell my house if I need to move." But selling your house will cost you in time and money. If you stay in your house less than 5 years, you could be losing a lot of money on transaction costs. And if the market dips when you want to dip, you could find yourself owing more than how much you can sell the house for.
If You Don't Plan to Stay There Forever
If you've found the house you plan to grow old in and stay in forever, then yeah, it probably makes sense to just go all in and buy that damn thing. If you aren't planning to stay there forever, then you need to run the numbers to figure out exactly how much buying will cost and compare that to how much renting will cost.
Run The Numbers
Everyone's life and finances are unique because we are all special and unique snowflakes. If you are considering buying a house, it is your responsibility to run the numbers to see what the cost of buying a home versus renting truly is.
There are some awesome resources available for free that can help you run your numbers. Here is an excellent, comprehensive calculator.
Make sure that the variables you input are relative to the house you'd like to buy. You can use Zillow to find housing prices comparable to the house you want to buy. There are a ton of variables you can adjust for more precise projections. I suggest you set aside some time so you can really dive in and make good use of the interactive calculator.
Realize that buying a house is probably going to be the biggest purchases of your life in terms of price tag and emotion, so it's important to look at the numbers and look inward so you can operate from a place a knowing and understanding.