You may have heard the saying that renting is throwing money down the drain, and you may have been told your whole life that you should climb the property ladder and buy a home because once you buy a home, you’re saving money and investing in things, so you’re no longer just throwing all that money away.
But in reality, the matter is much more complicated than that. Both buying and renting have their own pros and cons, financial and psychological costs, and we need to take all these things into consideration when making the decision to buy or rent.
So, the question here is, is it better to buy a home early and keep it as an investment, or is it better to rent and invest your money elsewhere?
Why Everyone Thinks Buying Is Better Than Renting
The first factor that makes most of us lean toward buying a house is economic. Historically, house prices tend to rise while you get nothing in return from renting. Therefore, most people believe that you are making an investment when you buy a house, but when you rent, you are just burning money.
For example, if your father bought a house in New York worth $100,000 in the 1980s. As time progresses, the population increases, and thus the real estate market rises, and now this house is worth more than a million dollars, which is very good.
Therefore, if your father had rented all those years, he would not have benefited from this huge increase, which is tenfold his net worth over the past thirty or forty years.
So, What Leads Me To Buy Or Rent A House?
Whether to buy or rent is an investment decision, and this decision has two components: one is financial and the other is psychological.
The financial component revolves around achieving the highest possible return on your investment, while the psychological component revolves around ensuring that your decision makes you as happy as possible. Therefore, the matter is slightly difficult to calculate.
For example, if buying a house means that it will satisfy your passion and ease of mobility, it may be financially better to buy a house. However, in terms of happiness, it will be worse off there.
The Financial Side Of Renting Or Buying A Home
Whether you are buying or renting, you need to think about the financial costs of each. We will review these costs in each case of buying and renting.
buying a house
The first section of financial costs that you encounter when buying a home is sunk costs. These are the one-time things you pay for, and you don’t get any money back for them. The second section is the home price.
When you think about buying a home, it means you think about the home purchase price which is what most people do. As if the house were a million-dollar property, we believe the cost of buying a home is $1 million. But the actual costs of buying a house are the price of the house plus other fees that you have to pay.
And these other costs we don’t get anything from. In general, there are five main types of costs when buying a home.
1. Property Taxes
Now this will vary slightly depending on which country you are in because there are different types of property taxes.
Basically, it is a tax that you must pay to the government when you purchase a property. How much you pay depends on the cost of the property and whether you are a first-time buyer.
For example, the US common property tax, which you pay to your state, is usually between 0.2 and 2%.
2. Lawyer’s Expenses
Depending on whether you are buying an additional property or your main home, and whether you are buying a huge mansion or a small apartment, we have attorney fees.
You will need to pay your attorney to cover the cost of all legal work associated with purchasing a home. This includes things like handling the title transfer, checking existing paperwork, checking whether your name is in fact the thing on the deed, and making sure you have all relevant planning permissions.
3. Evaluation Fees (If you get a loan from the bank)
This is what you pay the mortgage lender to assess the value of the property and see how much they are willing to lend you. It also depends on the type of property you are going to get and the type of mortgage you are getting.
But buying a home with a mortgage costs a lot of money. First, you have to make a down payment, which is a percentage of the total home value that you pay in advance from your bank account. This proportion is usually approximately 20%. Secondly, we have mortgage payments, which are basically the money that you borrow from the bank to cover the other 80% of the cost of the house.
So, this is a huge financial commitment. If you buy, say, a $1 million home with a 20% down payment, you’ll need to pay $200,000 upfront, then assume the mortgage interest is 3%. If you pay off your mortgage over 10 years, you’d have to pay $8,240 a month, and you’d end up paying over $1 million to the bank by the end of those 10 years.
4. Maintenance Costs
The other type of cost that you get when buying or renting is maintenance costs. Now, these are the things you need to pay for to actually make the place you bought or rented livable.
There is something called the 1% rule, which says that when you own a home, you should set aside about 1% of the home price per year for ongoing repair and maintenance costs because all kinds of things can break during the time you own your home like a broken boiler, leaks, drainpipes, all those things. So if your house costs a million dollars, for example, you should allocate about $ 3,000 annually for maintenance.
Now it’s clear that the 1% rule is just a very rough estimate. Depending on the age, condition, or location of your home, you may need to set more or less of this aside, but it’s a broad form of the rough brushstroke type.
However, if you rent, maintenance costs are fairly low, if not non-existent, because maintenance is technically the landlord‘s job. This is one of the main perks of leasing. But you have to pay a security deposit when moving.
5. Opportunity Cost
Opportunity costs are somewhat hidden, and most people tend not to factor in or even think about them, which is basically the potential benefits you miss out on by choosing one thing over another.
So if you use your money to buy a house, you decide to miss out on all the other things you could have done with that money.
But generally, in most decent cities, it’s a safe bet that the value of your home will grow over time. Let’s assume that home prices have increased by 5% each year. This means that after one year, your $1 million home will be worth an additional $50,000. So buying a home is actually a very good investment.
The key thing to remember here is that your management will vary, and the solution is to run the numbers yourself and see what happens in each buy or rent situation.
Renting A House
If you rely on renting, the main costs will be much simpler. There’s the rent you have to pay, and you have the cost of moving all your stuff into the apartment, which can add up if you move a lot.
The Psychological Side Of Renting Or Buying A Home
Both options have their own psychological aspects, and the right one for you will depend on your circumstances and priorities. We’ll explore some of the key psychological factors to keep in mind as you weigh the pros and cons of renting versus buying.
Stability Or Flexibility
One of the big benefits of buying a home is that you are putting down roots somewhere. You get a sense of security and stability because you know you have a roof over your head, and there is no landlord waiting for your rent payments. In addition, moving homes is one of the most stressful experiences that we as humans can go through.
On the flip side, if you’re the kind of person who wants to live a life where you move every two to three years or maybe even sooner, then buying a home may actually prevent you from doing so.
Although yes, we grow roots when we buy a house, if we sink most of our money into actually buying that house, we can lose our comfort of mobility, that is, our ability to take off and do something else away from that place.
Convenience
There are some conveniences that you get from renting that you don’t get from buying. You probably appreciate the fact that when you rent a house, at least if it’s in a decent location, you can easily get people to come and fix things.
When your toilet doesn’t work or the ventilation system fails, just email or text the owner and you’re done. But if you, for example, know how to use a hammer and nail to fix things, or if you don’t mind spending some extra time and effort doing it yourself, the convenience or ease factor probably doesn’t mean much to you.
If you own your home, there are also amenities. For a start, you can make as many structural, paint, or decorating changes as you want without the landlord breathing down your neck and worrying about your security deposit. You also have the comfort of feeling rooted.
Then there is also the idea of when renting, where you can rent a fully furnished place. And so it is very convenient to not have to carry the furniture around and to be able to move it somewhere. All things are provided, sofa, bedding, towels, plates, cutlery, and all that stuff.
After All, Should You Rent Or Buy A House?
There are pros and cons to both renting and buying a house, and the decision ultimately depends on your individual circumstances and financial situation. When determining whether to buy or rent, take into account the following factors:
Renting
- Renting can be more flexible, as you are not tied down to a specific property and can move more easily if your circumstances change.
- Renting can also be less expensive in the short term, as you do not have to come up with a down payment or pay for maintenance and repairs.
- On the other hand, renting means that you have the opportunity to build equity in a property or take advantage of the potential appreciation in the value of the property.
Buying
- Owning a home can be a good investment, as the value of the property may increase over time.
- Buying a home also gives you the freedom to make changes and improvements to the property as you see fit.
- However, buying a home is typically more expensive in the short term, as you will need to come up with a down payment and pay for closing costs. You will also be responsible for maintaining and repairing the property, which can be costly.
Conclusion
Ultimately, the decision to rent or buy a house depends on your financial situation and long-term goals. It can be helpful to consider your budget, the amount of money you have saved, your ability to afford ongoing maintenance and repairs, and your plans for the future. It may also be helpful to speak with a financial advisor or mortgage lender to help you make a decision that is right for you.
