Should I rent or buy a home?
Let’s get one thing straight before we go any further – your primary residence is not an investment. I don’t mean that a home can’t go up in value and that it might not benefit you if home prices go up and you own your property as opposed to renting it. But a primary residence, first and foremost, is a place where you live and where you come back to after you are done working each day, and where you choose to raise a family if that is something that you decide to do. Real estate can make a lot of sense as an investment, and I think that in the right situation, owning your primary residence can make a lot of sense. But buying a property just because you think it’s a good investment creates a number of issues for people who don’t have any business owning a home at that particular time in their lives.
You’re probably not here for a lecture so instead, let’s look at the factors that should help inform your thought process when it comes to deciding whether to rent or to buy. Before we get into the pure finances of it, there are a few items to consider first:
- Job Stability – Do you have a stable job that is likely to be there for you in the long run? If you’re married, is your spouse in a similar situation? Seasonal jobs, temporary workers, and contract work (either traditional or more recent developments like Uber and TaskRabbit) all have uncertainty associated with having a consistent, continued source of income. If you’re buying a house, uncertain earning potential is something that could impact you and prevent you from making payments later on in your mortgage. So this is a big, big factor that goes into determining whether you’re ready to buy a home.
- Location Stability – Do you want to move across the country? Do you get relocated frequently by your employer? If you’re thinking that a move is likely at any time in the next three years, you probably shouldn’t be considering home ownership. What if you had bought a place in 2006 and had to move in 2009 and sell near the bottom of the market? If you were a renter in this situation, you’re not on the hook for anything other than the months of rent left on your contract. If you are a homeowner and you are forced to (or decide to) move and sell, you’re on the hook for making up the difference in price if you have to sell for less than is remaining on your mortgage.
- Family Size – Are you planning on adding children, dogs, iguanas, or any other living beings that are going to take up space in your house in the near future? Make sure you’ve accounted for their needs as well. A one-bedroom condo in the city might be great if it’s just you and your spouse, but if you have twins due in a few months, you may outgrow that space and need something else quickly. Why could that be a problem? Transactional costs associated with real estate aren’t cheap, and that means you could be incurring fees and expenses for buying and selling properties that you could have easily avoided if you had bought the right home in the first place.
- Home Chores – When you buy a home, you become the maintenance crew. Even if you can’t do it yourself, you have to go and find contractors to fix problems that come up. Renters don’t have to deal with this. Sure, it’s not a huge problem if it’s something simple like a leaking toilet seal. But if you have roof trouble in the winter, do you want to be responsible for fixing it or finding someone to do the work? If your answer to those types of questions is “no”, then you probably shouldn’t be buying a home.
Those four items above aren’t directly related to finances – but they all have financial components to them.
Once you’ve answered those questions and are able to say that you feel comfortable with your answers, then you can get down to the real nuts and bolts – how much should you spend on a home, and is it cheaper to buy than rent where you want to live?
The New York Times has one of the best rent versus buy calculators I’ve found online. It lets you plug in your specific situation, run through a whole bunch of variables including mortgage rate, length of stay, cost, down payment, length of mortgage, and several other factors that you can play around with. That way, you can see whether the two-bedroom apartment for $1,500 with 5 percent annual rent increases is a better deal than buying a place for $300,000 for 30 years with a 4 percent adjustable-rate mortgage. I haven’t done the math on that example so I don’t have answers for you there, but go to the calculator and plug in your situation. Buying a primary residence is not a situation in which you want someone giving you the answer. We’re all biased as far as our real estate experiences are concerned because we typically have a really small sample size to work with when it comes to buying real estate. I’ve bought two properties now – my initial condo back in 2013 and then a single-family home with my wife in 2017. Those experiences may tell me something about how the process works, but you need to examine your specific situation by looking at your life and its likely path, as well as looking at the costs of renting and buying in your desired neighborhood.
Buying a home is a big decision. It’s probably the biggest financial decision you’ll make aside from having kids, who are money pits for the first 18 years of their lives and then gradually become slightly less financially burdensome. Your primary residence is your home. Don’t buy a place because your friends are buying homes and you don’t want to be left out. Don’t buy a place because your dad said he bought one when he was 20 and you should have one by the time you’re 30. Buy a home because it’s where you want to live for the long term, you have a plan in place to make your payments over time, and it’s cheaper than renting where you live.