Is It Better to Rent or to Buy?

Is it better to rent or buy a home?

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After nearly twenty years of homeownership, I’ve spent the past ten months renting an apartment. I like it. And I don’t. There are pros and cons to renting a place, just as there are pros and cons to owning a home. For me, one of the biggest cons is the close proximity to my neighbors — especially the guy upstairs, who stomps around like an 800-pound gorilla.

At first I thought that buying a home would also be a smart financial decision. The more research I do, however, the more I realize that the notion of homeownership as a magical path to wealth is a marketing ploy of the real estate industry. In fact, home prices (like gold prices) generally barely keep pace with inflation.

There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). But financially, it’s not always the best bet.

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Here in the Pacific Northwest, I’m finding that the annual cost of owning a home — taxes, interest, insurance, maintenance, HOA fees — is often greater than the cost of renting. Sometimes significantly greater.

Assuming you want to make a purely financial decision whether to rent or buy, how do you begin? There are a couple of ways to stay objective.

One way to tell whether it’s better to rent or buy is by checking the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t tough. All you do is:

  1. Find two similar houses (or condos or apartments), one for sale and one for rent.
  2. Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

Say, for example, you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block renting for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.

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But what does this number mean? Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting.” That’s a little opaque, but what Leonhardt means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities). In other words, you could rent a $200,000 house for $10,000 a year (or just over $800 per month), which is a pretty good deal.

The normal range nationwide is between 10 and 14 (meaning it would cost between $1,200 and $1,600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1,100 to $1,200 to rent a $200,000 house).

Price-to-rent ratio data isn’t widely available. If you search long enough, you can find some recent-ish info on the internet, but for hard numbers about your area, you’ll probably have to contact a real-estate agent.

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers don’t mean much on their own, but they can give you some sort of idea of whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)

The New York Times has a great rent vs. buy calculator that can help you decide which is best for you. Just plug in the numbers for your situation, and the calculator tells you how long it would take you to break even if you bought a house.

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Discussions of homeownership should be grounded in reality. Buying a home isn’t some magical financial panacea. You can waste just as much (or more!) as if you were renting, and you lose a lot of the flexibility and freedom you might otherwise enjoy. If you want to buy a home, do so. But don’t let anyone persuade you that you’re throwing your money away by renting.

As for me, I still plan to buy a home in the next few months. It’s not the best financial decision, but if I’m careful, I should be able to score a good deal, one that makes as much financial sense as renting. Best of all, once I own my own home, I won’t have to put up with the clump-clump-clump of a lead-footed neighbor upstairs.

27 comments
RachelLachance2
RachelLachance2

What's wrong with renting??


People should save their money until they have 20% or more. Cash only is ideal! Learn from the past people! 


Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).


You live exactly like people did in the 1970's, and suddenly there's tons of money. Usually moderate earners can save $500 a month on these types of luxuries. May not seem like much, but it's usually the difference between being in financial trouble, and at least not losing ground.


My point is that it's so odd that people seem to forget all the little things we have, buy, use - that they didn't in the "better" times. That stuff isn't free.

DianeBeck
DianeBeck

My dad always told me when I was younger that your living expenses(everything) shouldn't exceed 30% of your entire income.  Tying this into your house or apartment expense, do you think it's still(today) reasonable at all to expect that?  I don't.  And I  can't believe even a handful of people, normal people, can attest to doing so...Renting or buying is an age-old question.  I guess if you're shooting for what my dad was talking about, the cheaper option would rarely be buying...But there's always reasons for either option, like these here; renting vs. buying

JonathanSiu
JonathanSiu

Probably these question arises to those who are living in big cities where accomodation is quiet expensive so many people think whether to buy a house or get in rented will benefit them according to their income.Thanks for the article.

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talo
talo

Mortgage Rates are key - lower rates make buying more feasible. Then there are those monthly expenses you have as a homeowner and not as a renter. I developed this excel worksheet, feel free to use: http://www.otprj.com/buy_vs_rent.php

Jasonbaz77
Jasonbaz77

If you want to own a home that's great but people trying to justify it financially are just uninformed.


Don't buy a home thinking it's a great investment. It's a horrible investment. You could take that money and do much better investing it other ways. 

ashleydomz
ashleydomz

If credit is not an issue:- I would blindly suggest to stay away from renting a property, and would suggest to simply go forward with owning a property. 
To me - Renting & Buying a property are as follows :-
Renting is like-  Filling up others pockets, in the end you save nothing (investment).
Buying is like- Filling up your own pockets, in the end you will have a house with which (if you're smart enough) you can sell it for higher price and add up your investment. 

As easy as a pie,
SaleSwift London. 




JaneSmith1
JaneSmith1

The cost of a house is much more than is ever described in these calculations.  When you buy a home, you have to have a down payment of cash (20% in many markets), pay closing costs (4-10K) depending on the area, and if you have a mortgage, you do not pay $200,000 (less down payment) for the house, because you have not factored in the interest charges you are paying for the length of the loan.

You also have annual property taxes and property insurance.  Home maintenance expenses is another area that is rarely focused on as a tremendous financial and time drain.  You have to pay plumbers, electricians and other professionals to help maintain and replace things on your property.  You have to buy equipment to maintain your property, including the exterior.  If your furnace/water heater/AC unit/plumbing/electrical fails, you are talking thousands of dollars. Your roof may start to leak, your windows may need to be replaced, your floors may have to be redone, etc.  Home maintenance is not a random activity that you do when you feel like it or get to it.  It will cost money and also take time out of your leisure (i.e, time off/weekends), because if you don't regularly maintain your house, it will fall apart quickly.

When you sell the house, you not only have the closing costs once again, you will generally have to pay a realtor roughly 6% of the sale price.  In addition, the buyer's inspector may make a list of things that you never had to worry about when you purchased the home, but now are required to pay for and fix.  Many home sellers have to either reduce the sale price, cover a portion of the buyer's closing costs or give money to the buyer.  

It is also a myth that you can do "whatever" you want as a homeowner.  As a homeowner, you are part of a community, and you have neighbors who watch how you maintain the exterior and interior of your house and your property, because everything you do and don't do on a timely basis impacts the market value of the homes in your area.  If you don't maintain your house all the time, it will also go down in value when and if you decide to sell.  Your neighbors also watch the "coming and going" of your activities, because the biggest purchaser of homes are families, and they want a family friendly neighborhood to maintain their home's market values.

Besides the tax benefits (itemizing and deducting property taxes and mortgage interest), which will never offset your closing, maintenance and selling costs, the benefits of home ownership can include accessing your home equity to get a loan, which would be cheaper than getting an unsecured loan.   Owning a home also establishes roots if you are raising a family and provides a better living environment for children, and you are viewed differently by society if you own versus rent.  However, if you have to leave the area, because of a new job or personal reasons, you now have to "prep" your house for sale (i.e., spend more money) and wait for someone to want your house and pay what you think it is worth.  This may mean dropping the price dramatically and/or waiting a long time while paying one mortgage/taxes on the home while renting/paying for a house elsewhere.

Others that say you can rent your house or part of it, may have not experienced the full joys of being a landlord.

The reality is that most people own a house, because they just prefer to live in a house, so they accept the cost and loss of leisure time.  They also may want to raise a family and/or own pets (especially dogs) and get emotional satisfaction in home ownership.  However, if you have to move to take advantage of other opportunities, live somewhere else, etc., you have to divorce your house first.


mblstr.va
mblstr.va

If you can afford it buy, if you can't rent.  I own my own homes and renters are making me comfortable when I retire. 

efrustrated
efrustrated

As a single guy with predictable fear of commitment, I hated the idea of a mortgage 20 years ago. I NEEDED to be in my own place for the perceived security against souring relationships and landlords, so took a mortgage against my life principles. 

Bought at a price where monthly mortgage was lower than the equivalent rent, improved it a bit, lived there for some years, left it empty for a couple, eventually selling it for exactly double only 7 years later (would have been triple if I could have waited just another two+ years..). 

That gave me a boost and I've never looked back.

Home ownership worked for me, even if I've been renting for 6 years now. The money is in the bank for when i change my mind.

beachcomber381
beachcomber381

The 800 pound gorilla has nothing to do with the rent vs buy debate. This con is connected to the fact that he now lives in an apartment and not a house, regardless of whether he is an owner or a tenant. The author is apparently comparing buying a detached house with renting an apartment. He mixes two debates 1 -rent vs buy 2 - house vs apartment. Furthermore the price-to-rent ratio is not the only criterion to consider. The amount of down payment and the terms of the loan are also very important. If you can pay cash, buying will always make more sense in the long run. On the other hand, if you borrow 100% (theoretically) , renting will be a better solution as for the first decade or so, you will be an owner only on paper as the landlord is the bank and the interest that you pay is the rent. Between those two extremes, you have to do the math to find the most suitable option for yourself.

fickleandfey
fickleandfey

Real estate prices in The Bahamas are so ridiculous, and such a lack of information it's very hard to decide. The math works out though that I cannot afford the type of home I would want to stay in for the long-term, and rents are relatively cheap compared to mortgages. I don't see renting as throwing away money. You are paying for shelter. Likewise with interest, you are paying for money. I did some Price to REnt calculation and a fixer-upper to rent ratio was 22.2. I will rent in paradise.

FatSeanLives
FatSeanLives

Big emotional aspect to my decision to buy. But I can afford that.  By wearing old clothes, driving used cars, fixing everything myself within reason.  It is a lifestyle.  Do you want a house to check off "own a house" and "don't pay nobody rent" or because you want the experience?  BTW, HOAs take all the sport out of it!

PatnEstherEnte
PatnEstherEnte

I've read alot of the posts regarding this story.  It's very interesting, and both sides have their reasons, justified or not.  I think it is strictly a personal decision on whether to rent or buy. For my wife and I, we see this as strictly a future investment, not so much for ourselves, but for our sons. We made a conscious choice when we bought our home, making sure we tried to select a home that fit all of our needs, that we could spend the rest of our lives living in comfortably.  We really love our home, take really good care of it, pay our share of taxes, and hope and pray that someday it will help our sons when needed. Even though the housing market crashed a few years back, and our mortgage is under water, we've chosen to honor or mortgage obligations, instead of taking the easy road and walking away or short sale.  We figure, if we can still pay our mortgage, and it wouldn't affect our ability to live a comfortable lifestyle, then as long as we could continue, we will do so.

We know it's not the popular choice for most, but then again, we've never made decisions based upon popularity, rather, we've chosen to take our queue from the Lord, our parents, and trusted family/friends.  Believe me, there were times when we've thought twice about our decisions, but in the end, we made the right ones......... FOR US.

God bless

darthatect
darthatect

The ultimate advantage to buying is finally paying off the mortgage.  I paid off my home in 15 years, and now, with taxes, insurance and HOA dues (the only drawback), it costs me only $400 per month...in a neighborhood that has stayed stable for over 17 years (due to the HOA, a plus).  I was smart, and a little lucky.  I didn't over buy what I needed or could afford, and I kept up my house.  Now I essentially pay nothing, will be able to sell and get  all, plus a little more, of my 'rent' back, and will do so for the next 15-25 years.  Run your rent-to-purchase ration on that and see how THAT comes out.  My luck (smart?) was choosing a stable neighborhood, in a stable state (Orlando, Florida). Besides, I like it here.  At $1400 a month for 15 years, I paid out $252,000.  The house is currently worth a bit more then that, even after suffering through the big recession.  Our problem as a country, is overreaching, and buying more then we need or can afford, and hoping.  And I can now even rent my house out, and benefit over $1000 beyond expenses, and certainly rent a small apartment for less.  Go ahead, rent.  See if I care.

FakeDodgeViperGuy
FakeDodgeViperGuy

when you buy, you are STUCK. if the neighborhood changes or your life changes based on job or interests, you can't sell when you like because you have to live by the market. when you buy, you also are responsible for all repairs, property taxes, damage from hurriance earthquakes etc. it makes no sense to buy. and remember, you never own anything in life. once you die, someone else takes it. ownership is an illusion to get you to commit, nothing more. in other words, a scam.

will.hogann
will.hogann

You're better off buying an additional house (next door to you) and then renting it out.  30 years later you have a nice retirement package.  Just takes some serious guts - I wish I had them.

jessican
jessican

While I completely understand where you're coming from as far as the price of owning a home vs. the price of renting, you've completely ignored the issue of what you actually have at the end of the process. If you rent an apartment for 10 years at $1,000 a month, you've lost $120,000 by the end of that decade. If instead you spend that $1,000 a month on a mortgage for the next 10 years, you will have $120,000 of house by the end of the decade. If that covers the price of your house, you can then sell the house to get $120,000 in cash or you can apply that equity to another house. (I realize I'm ignoring interest. Please excuse my poor math and consider the general concept I'm trying to explain). Personally, I'd rather spend 10 years essentially paying myself $120,000 than paying someone else $120,000.

ruraynor
ruraynor

It really depends where you are in the world. Real estate in parts of the UK, especially parts of London that are getting gentrified, has shot up in price way above inflation and above many savings rates. If you'd bought a flat in Hackney in 2008 you'd be laughing now.

jssk
jssk

Another solution is to live on the top floor.

eaj2010
eaj2010

@beachcomber381 I agree with what your saying about him comparing a house to an apartment, you can rent houses as well. So the issue of people living above and below you is moot. 


WilliamVaccaro
WilliamVaccaro

@PatnEstherEnte I think there are few people who opted to stay the course and be responsible homeowners. My wife and I never missed a mortgage or HOA payment in 15 years. We were brought to our knees by deadbeats who chose to purposely miss three payments in order to renegotiate their mortgage or, did a short sale or just walked away. We were so desperate to get out of the area, we sold our home and had to bring $30,000 to closing. Owning a home was an American Dream, but as of late, appears to be the American nightmare. 

My opinion - if you decide to buy a home, condo etc, make damn sure it is what you want and where you want to be. 

DrCabler
DrCabler

@PatnEstherEnte Sounds like you are making wise choices.  The value of your house will eventually recover.  Making your decisions according to good morals and letting God lead the way is definitely the best way to go.  You will be leaving a legacy for your sons that is valuable, financial and otherwise.

eaj2010
eaj2010

@jessican I understand what you are saying but disagree. First of all paying $1000 a month for rent isn't  "losing money," you are paying for shelter. I see what your saying though, I like to put it as, you get nothing out of an apartment/rented home when you move out. But also, as many others have mentioned, if your home loses value you lose money. Say you bought your home for $100,000 and after the market crash its only worth $70,000 and you HAVE to sell it for whatever reason. You just lost $30,000 (possibly more considering other money invested in the property)  AND have nothing to show for it. So your in the same position as the renter, you both paid a monthly amount and having nothing to show for it, except the renter didn't ALSO lose $30,000.

monex
monex

@jessican I see your point you are trying to make.  However it is not that simple.  Let see there is property taxes, maintenance, insurance, interest rate risk, & market risk.  You can also throw the whole demographic risk going fwd of baby boomers sell their family home leading to oversupply in the marketplace.  Believe me I love owning a home and wouldn't pick renting over owning, however right now there is significant risk.  Properties are probably 30% overpriced.  Once longterm interest rates hit 5-6% and people have to renew their mortgages they will not be able to afford a doubling of their mortgage payments.  See what kind of supply hits the market then and watch the drop in house prices. 

cambrowarrior
cambrowarrior

@jessican The problem with that logic is you're treating the house like an investment. You haven't "lost" any money. The first 10 years of your mortgage is mostly paying interest on the mortgage. If you try to sell your home after 10 years, you'd better hope that it's worth more than you paid. For example, I bought my house about 10 years ago for $114k. After 10 years, I still owe over $90k (I've paid nearly $20k in interest on the mortgage, for the privilege of having borrowed so much money). Thanks to the crashed housing market, the very similar house next door to me could be expected to sell for about $70k. If I were to sell my house for the same amount (assuming that's the fair market value), I would lose $20k.Let's look at this from another perspective: "need to get out". If I were renting and needed to vacate my apartment for whatever reason, whether it's a job transfer or don't feel safe etc, I could stay til the end of my lease, or pay a few hundred dollars to break the lease. If I need to get out of my house, I have to sell it, and again, in the current market I could lose $20k.You may argue that you're building up equity by owning a house, which is true. But that equity is only good for...borrowing more money.From a financial perspective, buying a house is the better thing to do only if you're reasonably certain the value will go up over time. But, a house you live in should not be treated as an investment property. I left apartments and got a house, knowing I would be paying a few hundred dollars more a month, in order to have a yard to myself with no thundering footsteps or music above or below me, covered parking, and the ability to determine my own appliances and repairs. I made it about personal preference, and that I do not regret.

austin
austin

@eaj2010 @jessicanThat's flawed logic. The buyer didn't lose $30k, he made $70k! The renter made zilch!