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Buy vs. Rent: The Real Estate Dilemma

Written by Laura Martinez - 37 Comments

One goal that my husband and I have is to own a house. This hasn’t been a spur of the moment decision. We’ve been planning it for awhile, and have been working together toward our goal one step at time.

The decision of whether or not to buy a condo, townhouse, or house can be overwhelming. Today I want to take a look at how to break down a potential home purchase and examine the effects of your decision on you and your family.

Renting is a waste of money

You might feel pressure from others to buy a home as soon as possible. After all, “If you rent, you’re just throwing your money away.”

While I’m sure that people have good intentions when they say such things, it’s still a huge generalization that doesn’t take into account your individual circumstances. If you’re in an area where renting is much cheaper than owning, then you might be better served by renting.

If you’re not sure if that’s the case for you, run the numbers on the this calculator from the NY Times. This can give you an idea of how long it would take to break even if you buy vs. rent a home in your area.

Another thing to keep in mind is that renting is a great way to try out a new living arrangement without (literally) mortgaging your future on a relative unknown.


Opportunity cost

Homeowners pay an opportunity cost in the form of all the other things they could be doing with their money if they were renting a cheaper place. When people buy a home, it’s often larger than their previous rental, and generally more expensive. Besides paying the mortgage, you have to add the cost of taxes, home insurance, and possibly home association dues.

It’s also important to keep in mind that any extra money you spend on your mortgage, homeowner’s insurance, property taxes, and maintenance is money you can’t set aside to invest. Can you afford to pay a mortgage and still invest? If not, you may want to continue renting until your finances are stronger.

While you might be tempted by all the “good deals” produced by the current housing slowdown, you still might not be able to afford the long-term costs of owning a home. How much can a house end up costing you? Yahoo! Finance had an article by David Crook where he ran the numbers on home ownership costs:

You can easily end up spending three times the purchase price of a house. Today’s buyer of a typical $300,000 single-family home who takes out a 30-year loan will end up paying the price of the house again just in interest.

Add 30 years of property taxes, homeowner’s insurance, regular maintenance and a couple of big-ticket repairs or improvements, and the total cost of buying the home could easily top out at well over $1 million.

You’re pre-approved for a mortgage of $XXX,XXX

Just because your bank tells you something doesn’t mean it’s in your best interest to listen to them. We’ve been pre-approved for a much higher amount than we’re looking to spend. We’ve given our realtor a target price range around 65-70% of the amount the bank will give us. We want to continue to live below of our means, and we’d love to be able to afford a place with one income.

Instead of taking whatever they offer, get a mortgage that you can afford. Use a home affordability calculator – don’t just rely on what a bank or a mortgage broker tells you, as they’re often a bit aggressive with the numbers. My advice is to be conservative, and keep your mortgage payment below 25% of your net monthly income. This gives you a bit more wiggle room, as you also have to pay insurance, taxes, and maintenance with a house.

Take advantage of the $8,000 tax credit

If you can afford a home, the $8,000 tax credit for first-time homebuyers is a great incentive. In case you’re not familiar with this credit, you have to make your purchase between January 1st, 2009 and before November 30th, 2009 and you have to stay in your home for three years.

This is a refundable tax credit, and it’s phased out for individuals with AGI of $75k or higher or couples with AGI of $150k or higher. Here’s some info on how to claim it. Just be sure to look before you leap… Are you willing to spend $232,100 (the median price of new homes) just to get an extra $8,000 back form the IRS? We’re not, and I hope you aren’t, either.

Be willing to wait

We’ve decided that if none of the homes in our price range meet our criteria, then we’ll wait a bit longer and build up a larger down payment. When we do end up buying a house, we plan on staying there for a long time. Thus, it’s important for us to make a smart decision.

One of the big reasons that we rented a cheaper apartment was to be able to save some cash. We pay about $150/month less than our friends, which gives us some money to save with. We’re living below our means, and slowly building our savings.

Your thoughts

Do you rent or own a home? What factors did you consider when deciding whether or not to buy? Are you happy with your decision? What (if anything) would you have done differently if you could do it over again?

Published on July 21st, 2009
Modified on October 4th, 2011 - 37 Comments
Filed under: Real Estate

About the author: helps families achieve financial freedom by sharing tips for reducing debt and building freelance income over at Couple Money.

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37 Responses to “Buy vs. Rent: The Real Estate Dilemma”

  1. 1
    Rob Bennett Says:

    Most people who buy end up with more living space than most who rent. Whether that’s a good thing or not is for the individual involved to decide. But I think it is fair to say that renting tends to be the more frugal decision.

    There’s something about buying that makes people want to have lots of living space. And there’s something about renting that makes people want to get by with less living space.

    Rob

  2. 2
    Laura Says:

    @Rob: You raise a good point. I think that many people buy more, planning for the future (maybe kids), but they don’t really consider what they need and can push their budget going overboard.

  3. 3
    Writer's Coin Says:

    Wow, we both wrote about the exact same thing today! I’m also having trouble with the fact that what we want isn’t matching up with what we can afford. But the rates and the tax credit are so tempting…

    Well, back to browse the listings!

  4. 4
    Terri Alley Says:

    DH & I just closed on our first home last week. We took a hard look at our budget & used an online mortgage payment calculator to see how much house we could afford(factoring in a guesstimate for insurance, etc). We used an realtors website to view houses in our area that were in our price range. We also looked up the homes on our county auditor’s website to see how old they were, how much the taxes were and any recent improvements (new furnace, water heater & enclosed back porch). We purchased a smaller house, as we are about to become empty-nesters. The house had been on the market since last October (info we found at the realtor’s website) so we knew she was willing to sell. She had just dropped the price, and we got it for 10% less than she had just paid 2 years ago. When I got the closing statement, my jaw dropped – she had two mortgages on the house, and it took almost everything she got at closing to pay them off.
    I have already filed an amended 2008 return for the tax credit. Also, we can now itemize our deductions on our taxes, including property taxes, mortgage insurance, charitable contributions, employee business expenses and medical expenses.

  5. 5
    Rosa Says:

    We bought at what I thought was probably the top of the market back in 2002, and then prices just kept going up for the next few years.

    I still think it was a smart decision for us financially – we got a mortgage we could afford on either of our salaries, we were able to lead mitigation before we had our baby (rental units are generally not required to do this in our state, which I think is criminal), we found something in our neighborhood we could afford.

    What I didn’t take into account was how much *work* homeownership is. The combination of a big old house and a new baby was pretty overwhelming – he just turned four and i’m rediscovering the concept of free time.

  6. 6
    Mike Says:

    I’m still a fan of renting. Especially with dual-income, you can get some really fantastic places in a great location for a very low price per person (when you split it). And you don’t have to worry about maintaining the property! Furthermore, you can move somewhere new whenever your lease is up.

    However, in reality I think that buying a home isn’t really a financial decision for most people. It is an emotional one. They don’t buy a house because it is a good investment (even though they are often tricked into thinking so). Rather, they buy a house because it gives them a sense of pride, stability, and security.

    IMO, I’d rather rent to save cash and watch my savings grow faster so that when I’m closer to retirement I can buy a home 10x nicer than if I bought one now.

    Good post, thanks for sharing and stimulating a discussion!

  7. 7
    Jason Says:

    Nickel, I’m confused. This is the second post referring to your “husband”. I’ve been reading this site for years now. Is now Nickel and Mrs. Nickel posting on this site? You’ve told us in the past that you write this blog, and your wife writes the “raising 4 boys one”.
    None of this is very important, it’s just alittle confusing….
    Thanks!

  8. 8
    MikeS Says:

    My wife and I bought a condo a few years back and we’ll probably buy a bigger house in a couple years when we are thinking about having a second child.

    I think there is also a mentality difference for some people when it comes to renting. I noticed in the 7 years or so of renting, that I always could hear (TV, arguments, walking around) my neighbors and they didn’t seem to care.

    I live in a townhouse condo now and barely hear anything. The next place my wife and I want is a single family home with some yard for the kids to run around in. Don’t quite have that now with the condo. Looking forward to not having to worry about disturbing the neighbors or them disturbing me.

  9. 9
    Sandwich Artist Says:

    I look at our home the same way I look at our car and our pool. We’re not going to necessarily make back the money we put into it. If you look at things purely from the financial side, there are many things that we probably would never buy. There’s just something about having a house of your own. It’s not the same letting the kids swim in the community pool or the shared playground.

    I agree with Mike when he said that buying a house is an emotional decision for many people. For our family, it was worth buying a house no matter what the rent vs. own calculator said. For Mike it looks like renting is the way to go for him. I’m glad Mike isn’t buying a house just to buy a house because that’s part of what got us into this mortgage mess to begin with. We had to move to Texas from Las Vegas a few years ago to be able to afford a decent house (instead of $250k for a converted apartment in Vegas) because of all the speculating there that drove prices to ridiculous levels.

  10. 10
    craig Says:

    I am younger and rent and don’t plan on buying anytime soon. Way too much money and stress involved with trying to get a mortgage and have a place. I like your approach to just continue to build a fund for a downpayment.

  11. 11
    Tony Says:

    1. Article not written by Nickel, but guest writer named Laura (it’s listed under the title of article).

    2. I REALLY LIKE the link from the NY TIMES!

    3. Buying a home is really a more emotional/future planning purchase. I had dirt cheap rent living with a friend ($300/mo), and was hoarding up cash due to the low price. Got engaged, so the whole rommie thing wouldn’t work out so I bought 2 yrs ago.
    –according to that link, my renting would always be cheaper than purchasing, but it doesn’t factor in my situation such as an additional person; which would increase your living accomadations.

    Good article, cause I now plenty of people who got caught up in ‘needing’ to buy a house. I always retorted that there was nothing wrong with renting for awhile. Now they’re screwed and I’m living comfortably.

  12. 12
    kasey at thriftylittleblog Says:

    I’m actually buying my first home right now. I’m SO glad that I made the decision to do it for a few reasons:
    1. The amount I will pay at closing including downpayment and fees is about $8000… basically that tax credit will make it free.
    2. My mortgage/ insurance payments will be equal to the amount that the place rents for
    3. I’m getting a 5% interest rate. My parents had 16% on their first home (1980’s).
    4. Hey, it’s the American dream!

  13. 13
    olatunji ayodele Says:

    invest on property

  14. 14
    mils Says:

    Great article. Other things to keep in mind if you plan on buying, is not only the HOA fees, taxes, PMI if you didnt put down 20%, but also all the start up costs of buying a home (lawn mower, washer and dryer, MISC furniture, tools, rake, the list goes on!), also the electric bill / water bill will likely be higher than the apartment, due to increased space. The net of what I’m saying is, your mortgage is not your only monthly payment, there is a lot more to it. In my opinion, if you dont have 20% to put down, and you’re gonna have to go on the ramen noodle diet to afford your new home, better to rent.

  15. 15
    Nickel Says:

    Jason (and anyone else that’s confused: Sorry about that! This post was written by Laura. She’s a writer that’s been contributing an article per week for the last few months. I scheduled this one late last night and forgot to change the author from the default (me) to her — fixed that when I saw your comment. I’m pretty sure I’ve gotten the authorship correct on the past articles, but it’s easy to miss. Just be sure to check the byline (right after the title) as well as the “About This Author” box (if you’re viewing the site as opposed to RSS).

  16. 16
    Ann Says:

    I agree with Artist (#9)… something about having your own home. It gives you a sense of stability. I grew up the oldest of 4 kids. We moved into my parents’ house when I was 3, brother 1.5, and second brother due in one month. I lived there until I got married mid 20s (couple stints out on my own). It was the typical middle-class American family – dad worked, mom at home w/kids, Cape Cod house on a dead-end street, pool in the yard, and lots of young families with kids to play with. Mom & dad still living in that house (bought in 1964). I always assumed this was the “American Dream” and that someday I would be doing the same thing.

    And so I am. Husband & I rented for first 4 years of marriage and bought our house 18 years ago. It’s probably the first & last we will have. Kids have only lived here their whole lives. Pool in the yard, a deck for sitting outside & having BBQ, gardening, etc. That is the emotional side of the equation. You feel at “home.”

    That being said, it was definitely not an investment. As many have said, taxes, insurance, water/electricity, improvements, maintenance do take money away from saving/investing, not to mention the TIME that is given up to do all of these things. In hindsight I might have thought twice before buying a house.

  17. 17
    Jason Says:

    Thanks Nickel. It was the other one about disability insurance last week that I first noticed it. I assumed it was a typo or something, but when I saw it here again, I thought I’d say something. Guest author makes more sense than that you went out and got yourself a husband (not that there’s anything wrong with that :) )
    To the question at hand – My wife and I bought a house in April. The $8,000 credit plus low interest rates (we locked a 30 year at 5%) was too much to pass up. We love it, but I will admit there’s more to the increased expenses then just the mortgage and property taxes. Our water/trash went from $20 to $125 a month, electric from $125 to $200, and now we have HOA dues ($50 a month). On top of that is the hundreds of dollars spent at Loews for all the home projects. There’s so many things I never knew I needed (they make special wrenches just for pipes!). But we love having a place all our own and it makes all the expenses worth it.

  18. 18
    Easylivingsherpa.com Says:

    Renting may be cheaper in the short run, but the boogeyman of inflation is the homeowner’s friend if you stay in your home longer than 10 years.There are obviously benefits to home ownership beyond the financial, like peace of mind and a feeling of stability. Owners cannot have their home yanked away by a landlord who has decided to move back in. Owners can also change the color of their living room walls or fix a draft seeping through their windows without asking permission.

  19. 19
    Laura Says:

    This is a great discussion. Thanks for sharing your personal thoughts on the matter.

    @Teri: Great job on planning ahead on the house. Some people forget that this is the largest purchase they’ll make. Running the numbers is a must if you want to be a good choice.

    @Rosa: I’m glad you got an affordable mortgage in a good neighborhood. How much work did you have to put in to your home? I’m just curious as we’re looking at new and previously owned properties.

    @Mike: You bring out some great advantages of renting flexibility and more money to set aside for investing and saving. What do you invest your ‘extra’ money in? When are you planning to retire?

    @Kasey: I’m glad you saved up a down payment. With your payments being around rent price, it sounds as if you got a great deal. Congrats!

    @Mils: Great point on considering start-up costs (a great topic for another post!) since many don’t factor that in. A piece of advice passed on to us was to ask around too see how much utilities are for the places we’re looking at. You’ll be surprised at how real estate agents look at you when you ask.

  20. 20
    Kevin@OutOfYourRut Says:

    Laura & Nickel–Thanks for the link in the post (***renting is a great way to try out a new living arrangement ***)–Kevin@OutOfYourRut

    Speaking as one with many years of experience in the mortgage industry, you’re advice is right on the money with the way you’ve (realistically) addressed the various options.

    If I can add one more piece of advice to the topic… property values in many areas of the country are depressed right now, and in a lot of places they’re still falling. That’s in an evironment of 5% interest rates. A return to historic norms of 6-7-8% would likely accelerate the current price trend, so it may be an advantage to take your time, and get the best deal you can.

    If I were a betting man, I’d bet that time is probably on your side.

  21. 21
    Thomas Says:

    I used to think buying your way up in home as salary allowed was the way to go, even if you moved every few years. As I’ve come to learn, closing costs on the new home are just part of the cost. The actual moving cost, boxes, and especially prepping the sale home for the market can run in the $1000’s.

    I sold my house and now rent from my girlfriend and we split the mortgage 35% me, 65%. She gets the tax benefit and equity. It’s not our dream home, but I can see us staying longer than we’d like due to moving costs.

    Great post. I’ve always like this debate, esepcially after reading Robert Kiyosaki’s Rich Dad, Poor Dad.

  22. 22
    Max Says:

    I’ve been renting a house for the last 2 years at about a $1000 a month, and the thought that I’ve given well over $20000 to my landlord is just about making me sick right now.

    I’ve been looking to buy to take advantage of the “buyers” market and the $8000 tax credit, but it’s not necessarily a buyers market in my price range, hovering somewhere slightly above $100000, depending on how much the particular house is worth living in to us.

    I do have a pre-approval from the bank, but most of the houses in that price range always seem to have some problems, and when you find a good one, something inevitably falls through when you’re trying to negotiate a short-sale with the bank.

    We’ve already had 2 offers all but ignored, even when we offered what they were asking for 1 of them. The deals are out there, but it’s definitely not as easy as it should be.

    But in the end, with home prices lower than usual, low interest rates, and the tax credit to boot, it seems like the best way to go is to buy over renting.

    I figure with the housing market drop over the last 2 years, I would have probably lost about $20000 in value on any house I bought, so I probably broke even.

    Now if I can just buy a house before the market comes back.

  23. 23
    Mike Says:

    Nickel (or anybody else) – What do you think the odds are of extending the $8k first time home buyer credit past 11/30/2009? What about raising the amount to $15k?

    I’m driving 106 miles/day to work and back and ready to move, but I’m in no hurry as the drive is in light traffic and gas prices are still relatively low…but I don’t want to miss out on that tax credit.

    Hint: The area I’m buying is lost both a GM and Chrysler plant, so unemployment is 15% and home prices are reflecting that. I can get new construction for $150k. My point is – the $8k is substancial on a $150k purchase vs. a $250k purchase.

  24. 24
    Nickel Says:

    Mike: Your guess is as good as mine. The $15k thing keeps getting brought up, but never seems to go anywhere. I suspect it’s just political posturing, but who knows? As far as the credit getting extended, once again, who knows? Sorry I can’t offer more insight.

  25. 25
    Rosa Says:

    @Laura #19 -

    Our house is more work than most people’s because it’s 106 years old, but I notice most homeowners have a constantly-unfinished list of house projects. Ours are just a little more urgent.

    We have:
    *rebuilt the garage
    *lived without water for 3 weeks until we could get a contractor to replace the pipe from the water main to our property. (no fault there – it was the same age as the house and the elm tree finally ate it)
    *added railings and re-built the concrete steps by the sidewalk (our insurance company threatened to drop our insurance if we didn’t put in a railing.)
    * scraped lead paint in full lead-abatement gear and repainted the 2-story full-attic 3-color Victorian. My partner swears our next house will have stucco.
    * prune trees every year – some taller than the house
    * a large perennial flowerbed would take up all the free time I cared to give it – it’s now mostly echinacea
    * bleed the radiators
    * caulk all the windows
    * repair window screens
    * repair custom-size windows when neighbor-kids throw baseballs through them.
    * repair antique doorknobs
    * replace locks and doorframes
    * weatherproof around doors
    * insulate previously un-insulated walls
    * interior lead abatement of doors & windows
    * replacing one room’s carpet
    * rewired outlets that ought to be grounded, and weren’t.
    * added extra outlets
    * upgraded main electrical box
    * built a retaining wall

    Currently we’re rehabbing a kitchen that was installed in the ’60s (bronze oven and stove, gold-flecked formica countertops) and clumsily updated in the ’80s (glued-on wood paneling, overhead fluorescents, a dropped ceiling that looks like my old elementary school, hideous orange-brown linoleum.)

  26. 26
    Writer's Coin Says:

    Another reason we’re struggling with it is, what happens when we have kids? Will it be too small? Will we want to move again?

    Tough to know but it just gets you thinking and doubting.

  27. 27
    RB @ RichBy30Retireby40 Says:

    At the end of the day, you have to just do the math. If the cost to own is equivalent to the cost to rent, I’d generally buy. If you plan to be in the area for 5 years, buy. If not, rent.

    There’s no right or wrong reason. Owning my propreties over the past 6-7 years have given me a strong sense of stability and responsibility. The property I bought 7 years ago is now a cash flow positive rental. The house I bought 4.5 years ago is just my home. I’m in the 35% federal tax bracket, and pay 9.6% California state income tax, so the mortgage interest deduction really works for me.

    I’d happily rent if I knew I’d just be here temporarily. The one thing I will highlight though, is that the housing stock is generally better when purchased than when rented, as landlords don’t update the property as nice as owners do.

    You’ve got to live somewhere, so renters who feel they’ve “flushed” money down the drain over the years shouldn’t feel this way!

    Best,

    RB

  28. 28
    RB @ RichBy30Retireby40 Says:

    I can’t emphasize enough how much your tax break plays a part in the decision. If I was in the 10-20% tax bracket, I’d probably just rent because the deduction isn’t meaningful, and I wouldn’t have enough money for the median SFH in my area anyway. But in the 36% Federal bracket +9.6% state, I’m getting 46% back. On $50,000 in interest expense I spend, I get $23,000 back. That’s very meaningful to me, and makes ownership cheaper than renting my house.

    Best,

    RB

  29. 29
    Laura Says:

    Thanks Rosa for answering my question. I’m impressed with the work your have put into the home.

  30. 30
    Mike Says:

    RB – You must have a $1million+ house. Nice!

  31. 31
    Rosa Says:

    Thanks, Laura. I’ll tell my partner – he did most of the work.

    Sometimes I think the DIY home repair goes over the edge from frugal to obsessive, but it’s working out so far.

  32. 32
    Southern California Says:

    I’m 46 yrs old and have never owned a home and i’ve always rented.

    I can’t imagine buying for the following reasons.

    1. I live pay check to pay check

    2. I don’t have a penny for a down payment.

    3. 10% of my income goes into 401k. How am I supposed to save with that amount?

    4. The mortgage is equivalent as my rent but add on the other things like property taxes, HOA Fees and so on and all of a sudden what seemed like a no brainer would lead me to stress over something I could not afford, given all the extras that you have to pay each month.

    5. I am one of those people that will never be able to afford a house and one day when I switch jobs and make more money and can afford to save for a down payment, the housing market will have recovered, still keeping me out of the market.

    6. The only thing I can hope for is to keep working till I can’t move and hope to have enough money saved to last for old age, living, medical care, retirement or assisted living when i’m closer to death, where they don’t abuse the people living there, and funeral arrangements.

    7. I’ve heard in many cases, even when people pay off their homes, that in old age they can’t afford the fluctuating property taxes and are forced to sell because they are on fixed incomes.

  33. 33
    Adam Says:

    I’m really stuck right now. I’m in the military and know I’ll be moving in about 3 years. I have a little over $200k in savings and am looking at a $180k house in El Paso, TX. It’s a 3 bedroom house and I’d hope to rent the 2 spare rooms for $550 each per month. But I could always rent a 1 BRM apartment for $715 or get a roommate and pay $450 a month. I’m just not sure which is the right choice financially.

  34. 34
    Vacant Home Insurance Says:

    I agree with the other commenters. It seems like we live in a society where more is better. I wish people did a little research to see where needs vs. actual product meet.

  35. 35
    mt Says:

    SHORT SALE? Would it be recommended to let our house go and walk away? The pmts are too much and we dont see any appreciation for the next five years – we could walk away assuming the bank lets us go without any negative connotations and then buy again in 5 years. In the meantime I bet we could rent for a lot lower amount than the current mtg pmt. Your comments would be appreciated.

  36. 36
    Ms. Banshee Says:

    I am in the process of buying a house could someone tell me all the benefits that buying a house has over renting?

  37. 37
    Bankruptcy Attorney San Antonio Says:

    Unfortunately, some people never receive social benefit of “ownership mentality” because they they never actually “get” the ownership mentality even when they are owners. They still have a renter mentality and do nothing to their property (maintenance), which then not only brings down their property values but their neighbors’ as well. ALWAYS look for a set of rigidly-enforced restrictions when buying. Or, live in the middle of several acres.

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