Conventional wisdom dictates that buying is always better than renting, but we argue that there is a strong case for both options. This AD Thought will help you make that decision.
Renting and buying both have economic benefits, but we can only make a decision when we understand how each option fits into our own circumstances.
The Benefits of Renting
Flexibility: You can ensure your home is always suited to you. You will have the flexibility of changing location, size and style as needed.
Low maintenance: Renting is far less maintenance than owning a home. Attaching a dollar value to the time and money you would put into the maintenance of a home helps you to price this risk in. An easy way of pricing maintenance is thinking about average condo fees and/or management fees for a property like yours.
Diversity of investment: Rental allows for a diversity in investment. If you don’t have to place a down payment and invest in upgrades and maintenance, you can diversify and invest in areas outside of real estate. You can also participate in real estate investment without owning a home, so you don’t miss out on any upside.
Most importantly, it is critical to remember that renting has a value that we don’t always price in. Each of the items above has an economic payoff. The key is for you to assign a value to each of them and then make the decision between renting and purchasing.
The Risks of Buying
Disciplined saving: The big benefit to buying a house is to ensure that your dollars go to your own asset instead of somebody else’s. The idea that, after many years, you have a house of your own to show for all of the money spent is an attractive option.
Opportunity cost: Buying costs more when you factor in taxes, maintenance, and interest. It also ties up a significant amount of cash in a down payment. You risk foregoing any returns you could have had if you had invested the extra money and the down payment in an alternative, better investment. Your house is an investment and if it doesn’t grow as much as you hope, then you may have been better off investing elsewhere.
Interest rate risk: Many fail to consider the value of their investment and their ability to make payments if interest rates change. You need to have additional funds on reserve for such occasions
Maintenance: Repairs and maintenance will be your responsibility. This can be good if your repairs fetch you more value, but that may not always be the case. Again, you will need a reserve fund to accommodate sudden costs like these.
In summary, buying is great if the house is a great investment and fits your lifestyle in the long term. This means that buying at the right time, buying a house that you can grow in value, and preparing for the additional costs is critical.