Have you been spending a little too much time at home lately? I know my house is definitely feeling a little smaller than it used to these days. It got me thinking about the choice between renting vs. buying.
Is it better to rent or buy a house? If I was renting, I could move to a larger house and pay the extra rent, but if I own my home, I would need to do a complete remodel to add extra space.
Sometimes homeownership feels like a negative, but for me personally, the stock market feels risky compared to ‘bricks and mortar.’
This begs the question, could I make more money investing in stocks than real estate, or is it better to invest in my own home?
The Advantages of Renting vs. Buying
Renting does make sense if you want to live as cheaply as possible - perhaps pay off credit card or student debt, or if you plan on moving around. Renting gives you the flexibility to live where you want to live at that moment.
One advantage of renting is the simplicity of an inclusive monthly payment.
What you pay is, well, what you pay. You don’t have to worry about city taxes, HOA fees, repairs or homeowners insurance. If the roof leaks, a homeowner has to find the funds to fix it, a renter doesn’t.
Investing in a house offers poor liquidity.
If you are looking for flexibility in your investment, housing may be a poor choice for you.
Housing offers poor liquidity (the ability to become cash) compared to shares. Once you invest in a house, your money is not easily accessible; you cannot turn your house into cash quickly or easily. Investing in the stock market you can turn around and sell your shares in days, even hours. Selling a house is a tedious process in comparison!
If you are trying to live as cheaply as possible or buying a house in the place you live is not attainable on your income - definitely the case in San Francisco or New York, you can invest in a different town or city.
This allows you to invest in a house that you won’t live in, but you can take advantage of asset appreciation. (Asset appreciation is when your house value rises over time, above inflation.) You can also invest in the stock market, or sneakers or something else you are passionate about.
The Advantages of Buying vs. Renting
As a homeowner with a mortgage, a huge advantage over renting is that your payments will always be the same, even as your income appreciates over time.
If you took out a mortgage in 2000 for a nice average 3 bedroom, 2 bath home for $300,000 at an 8% interest rate (Freddie Mac), your repayments would be $1,468. In San Jose, California, that $300,000 house now rents for $3,895.
Of course, every area is different. San Jose has seen a lot of growth in twenty years, but perhaps your neighborhood hasn’t. Freddie Mac - a government-sponsored mortgage company, created by Congress in 1970, has some great rent vs. buy calculator tools to work out your financial story.
If you really want to get deep into the numbers, Khan Academy also has few tools.Personally, I feel much more comfortable investing in ‘bricks and mortar’ as opposed to numbers because a house gives me a roof over my head - if the stock market crashes, you can be left with nothing.
This is a purely emotional argument but important in decision making. For some people, the feeling of owning your own home outweighs any financial argument.
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How Important is it to You to be a Homeowner?
Homeownership is a core part of the American Dream!
Owning a home is something adults do as they prepare for a family, a life of stability and a component of upward mobility. It is also the comfort that you can paint the walls any color, hang pictures and choose your own window coverings without fear of losing your deposit!
Renting feels temporary. You are at living in a home, but your time there is at the whim of your landlord and rental contract. In addition, some landlords aren’t as quick to replace a leaking roof, broken toilet or stained carpet.
Although oftentimes as a homeowner, you don’t have the money to do that either!
The real advantage of renting is that when your life or lifestyle changes, you can change your house. Take a job in another city, downsize to save money or move because you just don’t like your neighbors. It is possible as a renter but less easy as a homeowner.
Investing Elsewhere vs. Investing in Real Estate
If you aren’t paying a mortgage, where are you investing extra cash? We hope you are investing in something!
When you look at twenty years of historical averages, investing in real estate gives a better return - 10.5% compared to the stock market - 9.8%. This is likely due to the hot housing markets we have had in the U.S. post-recession, but this isn’t always the case.
Go back even further, and you will find the reverse is true, the stock market gives a better return. The point is, both may change dependent on external circumstances that you cannot control. If you are buying purely for the investment you will likely make different decisions than if you are buying for yourself.
You may buy in an up and coming neighborhood to take advantage of asset growth, or you may buy a turn-key apartment that is easy to manage as a landlord.
If you do decide to rent and invest in the Stock Market as a better return on investment, you should invest as if you are paying a mortgage. Disciplined, consistent investment and the multiplying effect of time is a way to get an equivalent return to investing in real estate.
Don’t overlook putting extra funds into your retirement account or pay into a college savings account - you can use these funds for your own education (Bachelors, Masters or Doctorate) or for your children. These two methods are great to increase your return because you can invest and take advantage of the tax incentives and the multiplying benefits of time.
Whichever route you follow - buy or rent, always ‘run the numbers.’ Work out on paper what it will cost you today, in 5 years’ time, 10 years and 30 years. Whether you decide to own a home or rent, live in the house you can afford, not the house you want to afford.
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