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Renting vs Buying – Should You Rent or Buy Your Home?

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As a Realtor, I have dissuaded potential home buyers from buying more than once. Yes, it is not good for my pocketbook, but it is the right thing to do. If you’re in the financial and credit position to buy a house, buying may still not be the right thing for you (see below). For the most part, I feel that owning a home is a great thing and an amazing way to build long-term wealth — so…when the conditions are right, you should definitely buy.

When Renting Is Better Than Buying

Here are a few scenarios where I feel renting is a better choice

  • You need the flexibility. For example, if you just started your career and you’re still aggressively looking to advance, your new position or your new job may take you away from the area you are now. In this case you want to maximize your flexibility and not lock yourself down to an area.
  • You know you have to move in less than 5 years. If you know for sure that you will be moving in less than 5 years, consider renting instead. The cost of buying and selling a house is rather high, and you might not be able to break even if the home value has not appreciate enough.
  • The cost of renting is cheaper than buying. This is possible in the short-term but very rare in the long-term. When you consider the costs, be sure to compare apple to apple (see The Math of Renting vs Buying below).
  • You need to improve your credit. Although you qualifies for a loan now, it might be better to wait if you don’t have the best credit score. With a higher score, you could qualify for a lower interest rate and save yourself a lot of money over the life of the loan.
  • You need more money. Yes, you can buy a house with as little as 0% down, but that might not be a good idea. At the minimum, I recommend using a 3% down loan, and optimally a 20% down to completely avoid paying private mortgage insurance (PMI). It is also a good idea to have at least 3 months worth of reserve fund after you purchased.

The Math of Renting vs Buying

If the everything above checked out, the math really favors buying. Here is a real scenario in my market (Northern Virginia…your local market may be different).

Scenario 1: $2,000 rent vs $345,000 sales price at 20% down

Renting Buying
Monthly Rent  $  2,000
Home Price  $345,000
Down Payment  $69,000
Mortgage Payment
Principal and Interest  $1,300
Taxes  $300
Insurance  $75
HOA  $90

As you can see, it is less expensive to buy even if the we take into account that homeowners have to pay for maintenance and more for insurance.

Here is how the numbers compare over 10 years (this doesn’t take into account rent increase for the renter or slight increase in taxes and insurance for the buyer). As you can see, being a home owner is clearly better than being a renter.

Year Renting Buying Principal Paid Net Expense Buy > Rent
1  $24,000  $21,180  $4,967  $16,213  $7,787
2  $48,000  $42,360  $10,130  $32,230  $15,770
3  $72,000  $63,540  $15,496  $ 48,044  $23,956
4  $96,000  $ 84,720  $21,074  $63,646  $32,354
5  $120,000  $105,900  $26,872  $79,028  $40,972
6  $144,000  $127,080  $32,899  $94,181  $49,819
7  $168,000  $148,260  $39,163  $109,097  $58,903
8  $192,000  $169,440  $45,675  $123,765  $68,235
9  $216,000  $190,620  $52,443  $138,177  $77,823
10  $240,000  $211,800  $59,479  $152,321  $87,679

Scenario 2: $2,000 rent vs $345,000 sales price at 5% down

Ok, so what happens if you put less money down? Well, you’re going to pay private mortgage insurance (PMI) and your interest payments will be higher.

Renting Buying
Monthly Rent  $  2,000
Home Price  $345,000
Down Payment  $17,250
Mortgage Payment
Principal and Interest  $1,541
Taxes  $300
Insurance  $75
HOA  $90
PMI  $161

Okay, so now it costs more to own than it is to rent…but wait…if we take into account the principal paid, it is still cheaper to own — buying is better than renting!

Year Renting Buying Principal Paid Net Expense Buy > Rent
1  $24,000  $26,004  $5,898  $20,106  $3,894
2  $48,000  $52,008  $12,029  $39,979  $8,021
3  $72,000  $78,012  $18,401  $59,611  $12,389
4  $96,000  $ 104,016  $25,025  $78,911  $17,009
5  $120,000  $130,020  $31,911  $98,109  $21,891
6  $144,000  $156,024  $39,068  $116,965  $27,044
7  $168,000  $182,028  $46,507  $135,521  $32,479
8  $192,000  $208,032  $54,239  $153,793  $38,207
9  $216,000  $234,036  $62,277  $171,759  $44,241
10  $240,000  $260,040  $70,632  $189,408  $50,592

As you can see, it is hard for renters to get financially ahead of owners.

But there are more advantages for home owners:

  1. Tax Savings – Homeowners can deduct their interest payments and use that to reduce their taxes — renters on the other hand…are out of luck!
  2. Home Value Appreciation – Homes appreciate in value over time. The pace is about the same as inflation so over the course of 30 years, my $345,000 house appreciating at 3% will be worth about $837,000 (Inflation data from InflationData.com and calculation using Investment Calculator at Calculator.net)
  3. Rent Increases – Let’s assume rent also increases at the same rate of 3% a year, $2,000 rent today would be $4,850…wow.

Rent vs Buy Calculator

If you are not inclined to do the math manually, here is a handy dandy Calculator from NerdWallet. The numbers do not match up exactly, but they are close enough for you to see.

Renting vs Buying Calculator

Bottom Line

Before making this important “Renting vs Buying” decision, think carefully about which option is best for you. You don’t want to buy if you have to sell in less than five years. At the same time, the longer you wait to buy the more wealth building you will miss out on.

Let me know what you think about renting vs buying below…

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Renting vs Buying – Should You Rent or Buy Your Home?

by Pinyo Bhulipongsanon time to read: 3 min