A recurrently hot topic in personal finance is the debate over whether to buy or rent a home. The conventional wisdom has always been that everyone should strive to be a homeowner and to stop paying rent. Prices in some markets still haven’t recovered from the drops in 2008/2009 and the government is still offering incentives to home buyers. But is buying a home always the best decision?
Kyle Fishman recently wrote on article on Seeking Alpha arguing that renting is far superior to owning a home. His reasons include:
- Homeowners still have to pay rent in the form of property tax, maintenance/repairs, insurance, mortgage interest, and opportunity cost (the amount invested in the house could have alternatively been producing gains in the stock market)
- Transaction costs – you pay 7-10% of the cost of the house when you purchase it on legal, real estate agent, title check, inspections, ..) You then pay another 7% to 10% when it comes time to sell.
- Convenience. It’s the landlord’s responsibility to make necessary repairs, keep the driveway plowed, and the lawn mowed.
- You are more mobile; it’s easier to move quickly whether you find another job or have some other reason to move such as safety concerns, conflicts with neighbors, or changes in the neighborhood.
Given all of these issues, you might wonder why you should seriously think about owning a home. Here are some advantages and disadvantages to consider:
- Security. Owning a home will give you a sense of security that you cannot find in a rental unit.
- You can customize your home to your individual needs, as opposed to rental units, where your options are more limited.
- You will have a sense of permanence and a feeling of being part of a community when you own your home.
- Most homes do appreciate in value over time. In addition, owning a home will reduce your federal and state tax obligations because of the deductibility of interest payments on your mortgage.
- A home is a vehicle for forced savings. You have probably heard the argument for term life insurance over your whole life: Buy term and invest the difference. The reality is that most people who buy term life insurance spend the difference. Having a mortgage payment due forces you to make payments. Over time, you will find that you have accumulated significant equity in your home.
- If you have a fixed-rate mortgage, your mortgage costs will be stable for the entire period of your mortgage, which is commonly 30 years. Rent typically increases yearly.
There are many factors that go into the decision whether to buy or rent. Here is an article sent to me by Robert Liano that has the best calculator I’ve seen to help you make that decision.