I’ve heard some people say that renting is better for them than buying. For those who can afford/qualify for either option, in what cases is that true? It seems logically better to be putting money toward a mortgage than toward rent.
You are right, all other things being equal, it does seem to make sense to put money toward purchasing property and putting money into owning an asset rather than paying rent to someone. Buying a home can be a great way to put money toward your future because property (when it’s maintained) tends to rise in value with the market and keep up with inflation. Assuming you have the budget to make the mortgage payments and put aside money for maintenance costs a house can be a great long-term asset.
However, a house is not only a long-term asset, it’s also a long-term responsibility. To buy a house, keep up with the mortgage payments, and perform regular maintenance (such as replacing the roof, repainting, lawn care, fixing the foundation, and keeping the building up to code) requires both social and financial stability. In other words, if you plan to buy a house it’s a good idea to make sure you can live in it for several years, maybe even decades.
People who avoid purchasing houses in favour of renting usually fall into one of four categories:
- Moving for work – Owning a house makes sense when you plan to live in one place for a long period of time. It’s a significant investment of your time and energy to inspect, purchase, and maintain a house. A lot of people these days either want to travel or need to travel due to a lack of job security.Of course if you need to move for work-related reasons you can sell a house, but that is also a large undertaking. When the housing market is stagnant or dropping churning through a new house every year or two becomes expensive.
- Avoiding debt – A lack of job security also ties into some people being adverse to carrying debt. A house is a big purchase, usually the largest a person will make. When the economy is stable and people have secure jobs, people don’t tend to move as much and a house becomes an attractive purchase.However, as we saw with the 2007-2008 housing crisis, sometimes a recession can kick the life out of the job market and, in turn, the housing market. If a large number of people lose their jobs they will want to unload their houses (and the associated debt load) to make ends meet or travel for new work. This drives housing prices down, which makes it impossible for their neighbours to sell their houses for enough money to cover their mortgages. They risk defaulting on the house and losing all the time and money they sank into the property.
In short, some people don’t want to risk having a lot of debt and a house means carrying a lot of debt.
- Lack of down payment – Also on the topic of money and large purchases, it’s entirely possible for someone to have steady employment and enough money to cover either rent or mortgage payments, but not have enough savings to cover a down payment. People who haven’t stored away enough cash or collateral may have trouble fronting the money for a house. At the same time their rent and other expenses may be high enough to prohibit saving for a down payment. It can be a vicious cycle for people who may want to put their money into a property rather than pay rent, but can’t save enough money to afford a down payment because they’re renting.
- Small space requirements – Another consideration is some people don’t need much space. People with families will probably look at the cost of a house and the cost of renting and decide the monthly payments work out to be about the same. In those cases it makes sense to buy rather than rent.On the other hand, someone who lives minimally and only needs a bachelor apartment is probably going to have low rent costs and may save a lot of money each month by renting rather than purchasing a house.
As an example, I talked with someone recently about apartments and houses in their area. One of the least expensive houses was $240,000 and would have a combined mortgage and tax payment of about $1,300 per month, not including utilities and maintenance. An apartment on the same street with utilities included was about $700. After paying to heat the house a single bedroom apartment would be less than half the cost. In the short-term, if one didn’t need the extra space, the apartment is an attractive option.
Some people will point out that, 25 years down the road, the house will be paid off and its costs drop significantly. Which is true, the house gets less expensive over time (relatively speaking). However, if the money saved on the apartment each month went into conservative investments it would accumulate quite a bit. The house, according to my mortgage calculator, ends up costing $394,000 over 25 years while the apartment costs $210,000. If the difference is invested conservatively each year at 5% interest, the person renting the apartment ends up with about half a million dollars ($497,000). This is probably close to the value of the house, after inflation is factored in, so both the renter and the house buyer end up with a similar amount of assets.
Again, in situations where a person has the financial stability to consider making a long-term commitment, a house makes a lot of sense. It’s likely to go up in value over time and be less expensive in your retirement years. However, market instability, and debt aversion can make people hold off. Also, people with small space/resource requirements may save a lot of money (at least in the short-term) by renting small apartments when they don’t need an entire house worth of space.
Comments are closed, but trackbacks and pingbacks are open.