Which is actually cheaper, buying or renting a house? Lets crunch the numbers to determine which is actually less expensive, and which factors to consider to determine which is right for you. Enjoy! Add me on Snapchat/Instagram: GPStephan
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I think there’s a common misconception that buying is always the better choice, and that renting is just throwing money out of the window. But you can’t deny that many high-profile people just end up renting their homes…why is this?
Lets first start with owning a home. Many people just look at the cost of rent, then look at the mortgage payment – see it’s maybe a little more, but think “I can own this for just a little bit more, buying is a waste!” However, the actual cost of owning is home is much greater than just your mortgage payment. You also have property taxes, insurance, and repairs to take into consideration – not to mention the opportunity cost of the money that you invest into your home.
Purely for cash flow purposes, renting is usually cheaper. Even though you don’t get the tax benefits of owning, usually renting and investing elsewhere is cheapest month-to-month out of pocket. Not only is it “cheaper” for cash flow purposes, but you have the mobility to pick up and leave when your rent is up. You’re not responsible for maintenance. You don’t need to bother selling it when you’re done. You just pick up and go. You can also invest your money invested elsewhere, potentially making you even more money.
But in terms of NET cost over 7 years, the lease will cost you MORE than owning a home, realizing the tax benefits, seeing some appreciation, and paying down your loan.
So what’s the advantage of renting?
First of all, this assumes the market goes up over 7 years…if the market is about the same price or drops, you’ll actually come out AHEAD by renting. You’ll also come out ahead by renting if you can make more than a 12% return on your down payment elsewhere. You’ll also come out AHEAD by renting if you’re only going to live in the home for 1-3 years and plan to sell it, unless you get lucky with a rapidly appreciating market. So it takes a lot of averages and assumptions to really decide which one is better.
The biggest downside I see with buying is that it ties up capital that COULD be deployed in a business that would generate higher returns. For someone who only wants to buy an live there a few years and sell, it’s dangerous to assume the market will continue going upward in a short period of time. So the “cost” of renting is sometimes much cheaper than just owning the home for a few years.
BUT….for those who plan to live in their home for more than 7 years or so, generally speaking buying is better. You basically lock in your cost of ownership by buying – you won’t have rent increases, you won’t have a landlord telling you what to do, and you have total control over the property. You also get the tax benefits of owning and you can build up equity in an appreciating asset.
However, you’re tying yourself down and if you decide to sell after a year or two, you’ll likely take a loss unless your market appreciates in price enough to make up the closing costs and commissions. But long term, owning will be cheaper if you intend to live there long term.
So like I said, determining which is cheaper really depends on quite a few variables – short term, it’s generally better to rent. Long term, generally better to own. And the longer you stay in a property, the more it usually makes sense just to own it.
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