First-time Homebuyer Series: Own or Rent?
There are many online calculators to help you decide to rent or own. But at the end of the day it isn’t an objective decision based only on empirical numbers. Here are my guidelines to help you decide to buy or rent.
Rent if you are new to the area. Renting for the first few years when you are new to a city is common sense. You should take the time to figure out if you want to settle down in a particular city and what neighborhoods fit your lifestyle. You are probably starting to build your career and may want to maintain flexibility to job hop. Considering purely lifetime earnings, job hopping almost always earns you more.
You’re throwing away money in both cases, and in many other parts of your life. Renting is often looked down upon as “throwing away” money. In reality, the many fees and costs of getting a mortgage, maintaining and selling a home is money that you throw away. Insurance, property tax, and repair costs will go up. Maintaining a lawn, hiring and supervising contractors, and driving to the store costs your time. When you factor in the opportunity cost of the down payment, the returns look less attractive.
There is a lot of noise from the media (and often loved ones) demonizing renting: I have personally heard, “you are paying your landlord’s mortgage!” When you buy a house, real estate agents and loan officers earn commissions, which goes towards their own mortgage. When you go to a restaurant, you are also paying for the owner’s mortgage. It's a weak argument that is often broadcasted loudly. Instead focus on what you gain from deciding to rent or own.
Abundance rather than scarcity. The idea that you are throwing away money or losing something stems from a scarcity mindset and fear of loss. As a high-income tech worker, you can focus a little less on the out of pocket cost of renting verses owning, because there may be additional value to gain from buying a more expensive property as long as your budget supports it.
Instead adopt the abundance mindset. Renting and owning have their advantages and there is opportunity for gratitude in each situation. When you rent, you have the flexibility and can move fairly effortlessly. You avoid dealing with maintenance and repairs. When you own, you have pride of ownership and stability. You have a place to raise a family and make memories.
Calculate the numbers. Lastly, always calculate the numbers so you can see the costs on paper. The cost of renting is fairly easy. They’re typically the monthly rent, renters insurance, application fees, and maybe some other one-time costs (e.g., move-out cleaning). For buying a house with a mortgage here are the typical fees.
- Loan costs
- Interest - cost of borrowing the money. This decreases as your principal is paid down over time according to amortization schedule.
- Closing costs - one time document fees, appraisals, commissions, transfer fees, etc.
- Other - You may have mortgage insurance if you put less than 20% down.
- Homeowners Insurance - your lender will require you to get insurance to protect your house against hazards.
- Property Tax - Taxes collected by the city/state
- Maintenance - Budget 1-2% of purchase price a year to save for a rainy day fund to access for big repairs.
- Opportunity cost - A large down payment means that money is tied up and can’t be used for other investment opportunities like stocks. Historically, stocks do a few percentage points better than house appreciation on an annualized basis.
This captures most but not all of the factors you should consider. Calculate the cost per month and compare the numbers for renting and owning so it is apples-to-apples.
The way I see it is that there are three values to consider: money, time, and location. Renting provides you with the value of time and location. You aren’t tied to a location for a long period of time (leases are 12 months or shorter), providing you with flexibility to live where you want in the world. You don’t need to spend time with home maintenance and repairs. Owning can give you long-term generational wealth. You can build your wealth more quickly by renting your home to tenants and claiming tax deductions.
As a tech worker, you most likely live in a tech hub, where house prices are rising rapidly. This creates opportunities for investors, but makes it difficult to own a primary residence. It’s still possible with some creativity, which we will cover in future articles on Debug Finance. For more information, see our First-time Home Buyer series of articles on relevant topics to help you buy your first home!