Should You Rent or Buy a Home?

As I enter my 28th year of life, I am met with several new financial challenges, questions, and opportunities. One of the most daunting decisions we currently face is the biggest purchase that young adults take: buying our first home. But, with so much debt already, does it make more sense to take the plunge and buy a house, or continue to rent?

The Case for Buying

One of the most frustrating things in my life is the rent payment. On the first of every month, we cut a check to our landlord for $1,432 (rent +water), which is about average for a two bedroom apartment in the Houston city limits. Every time that check is sent, I can almost hear an audible “flushhhhh” sound. Despite our monthly payments, we build no equity in the apartment – our ownership remains at zero. It is heartbreaking, and feels like we are throwing away money while simultaneously lining our landlord’s pockets . Couple that with the already hefty monthly debt obligation, and the pain is more pronounced.

With home ownership, you build something. Even in the beginning of the mortgage payments, the amortization (what allocation of payment goes to interest vs principle) allows you to build real ownership of the house. I imagine that this feeling would be quite powerful, and the monthly housing payment wouldn’t be so painful if I knew that part of it was helping to build equity and subsequently net worth.

Another benefit of buying a home is that it opens up the opportunity for another revenue stream further down the line. Let’s say we buy a starter home in Houston, a 1,700 sq. foot 3/2, for $150,000. As our family and wealth grow, there may be a need for a different, larger home. So, we move out and buy a new home, let’s say this one is 3000 sq. feet and 4/4. If we are wise, we could rent out the smaller home while we live in the larger home. Rent for a house should be anywhere from 0.8% to 1.1% of the home’s value every month. In this case, that would be $1,200-$1,650 in rent per month. I understand that not all of that money would be pocketed – mortgage, maintenance, and property taxes will take a chunk. But it will still allow us to make a modest profit and grow net worth relatively passively.

As it stands right now, Houston has one of the most affordable housing markets for a large city in the United States. The examples I gave in the previous paragraph were not fictional – we really can buy a decent home in a good neighborhood for less than $200,000. Considering the relatively high salaries in Houston, it makes for an outstanding income to cost-of-living ratio. In fact, Forbes ranked the Houston metroplex as #1 on “The Cities Where Your Salary Will Stretch The Furthest 2015.” Given our combined salaries, we could certainly handle the mortgage, property taxes, and upkeep of a starter home. We wouldn’t find that in any other city in the nation. Combine this with the fact that mortgage interest rates are still absurdly low in comparison to historic rates, and the deal is even sweeter.

The Case for Renting

The biggest advantage of renting is the freedom that it brings. If I have a bad neighbor or landlord, I can pick up and leave at the end of a lease with little to no cost aside from moving. We wouldn’t be able to do that if we were owning due to the time it takes to list the house, sell, and close the deal. Not to mention, the process doubles when we go to buy a different house! After all the costs associated with buying/selling, it is almost always going to be cheaper to rent unless you decide to stay put for at least 3 years. So if you buy, you better like your neighbors, because you are stuck with them for the foreseeable future.

Next, renting means you aren’t stuck with the bill for any maintenance associated with the property. If the A/C doesn’t work (which is a necessity in Texas), just call the property manager and poof, someone is there to fix it. Landscaping? Done. Pool? Clean and ready to go. All of these things come with a premium, but the convenience and hedge against risk may be worth it.

Let’s consider one of the biggest expected expenses with owning a home – the roof. Roofs (rooves?) have a lifetime of 20-25 years on average. When they need to be replaced, it is a doozy. Home Advisor states that the average cost to replace a roof in Houston is $7,516, with the costs ranging from $5,300-$10,000. Depending on where you live and the complexity of the roof, that price could be even higher. Our friends at Afford Anything give an estimate of allocating 1% of the home’s value to repairs and maintenance annually. So in the case of our hypothetical $150,000 home, we would set aside $1,500 a year towards maintenance. That seems about right, but it doesn’t account for timing of maintenance, which I will cover next.

It’s easy enough to follow the 1% annual rule for home maintenance. But, you are still at a big risk when it comes to home ownership. Murphy’s Law states that if something can go wrong, it will. To add to Murphy’s adage, I would say that things that are going to go wrong tend to go wrong all at once. When it rains, it pours. In this case, that rain may end up in your living room. You may have thousands of dollars saved in the home maintenance fund, but who says that all the maintenance will be so nicely spaced out? When you rent, all of that uncertainty vanishes.

The Verdict

After extensive discussions with my wife about this, we have decided to begin doing some more serious research about home ownership. I’m not sure we are quite ready to take the plunge… yet. But with thorough preparation, I am sure that we will be ready soon, likely within the next year or two. That way we will have plenty of time to save up a down payment, shop around, and continue to pay down our student loan debt. In the meantime, I will continue to write blog posts, talk to others in the community, and read tons of books. We may never be certain that the time is right. But, fortune favors the prepared, so we will do our due diligence to position ourselves as best as we can.

Do you rent or own your home? Do you have any tips for us or the readers? Let us know in the comments below!

8 Replies to “Should You Rent or Buy a Home?”

  1. MBF,
    Due to changing life events; (job changes, relationships, marriage, child, more job changes, divorce, child off to college, etc.) I have rented 12 different apartments and have owned 3 different homes over the last 27 years. I list these facts so you understand that my opinion is based in large part to my personal experience and I’ve likely moved way more often than the average. I currently rent an apartment and have done so for the past 5 years. I also carried a mortgage until just 18 months ago as a condition of a divorce agreement so my ex spouse had a place to live until our son graduated from high school.

    When you factor in P&I, front and back end closing costs, maintenance, insurance, property taxes and risk of housing market decreases (ala, Great Recession) I believe you need to figure your break even point (between buying and renting) to be between 5-10 years rather than 3 years. That range depends on the housing market where you are looking to buy.

    Also, a big part factor lies in what you consider to be quality of life. When you own a home you will be spending a significant amount of your time on maintaining and caring for that property. When renting you can instead spend that time with your family, traveling or working extra hours, picking up a part time job or starting your own small business. To me, our “time” is our greatest asset.
    I currently rent, largely because I’m single, with an empty nest, a job that requires me to work long hours and travel. I choose not to spend the free time I do have painting, mowing a lawn, trimming hedges, remodeling, repairing leaky facets, etc.

    Also, I’ve committed to never borrow money again for any reason so I will pay cash for my next home purchase (if I decide to buy again). I eliminated the last of my debt when I sold that house 18 months ago. Without any debt I am able to maximize contributions to my 403B ($18,000), Roth IRA ($5,500), pay cash for my son’s college tuition costs and invest in non-retirement brokerage accounts while maintaining a fully funded emergency fund to cover 6 months of living expenses.
    In short, I value the “freedom” that you cited as an advantage to renting….freedom to choose how to spend my time. By renting a place below my means, my monthly expenses are much lower than if I were to buy another property (when you factor in all expenses I listed above). I’m able to take the rest of my disposable income and invest it in assets (primarily stocks and mutual funds) that I don’t need “take care of” in the traditional sense. I spend time every month managing my assets but I can do that from another city, an airport, a Starbucks, the bathroom or anywhere else I can get internet access.

    I’ve seen many ppl over the years become slaves to their homes…and I was one of them. I am obviously at a different stage of life than you are but if I could go back and I do it again I wouldn’t buy my first home until I was completely debt free and could pay cash for the house. If this would take too long given life circumstances (growing family, etc) I’d pull the trigger only after being debt free and having a 20% down payment on a 15 year fixed mortgage and a 6 month emergency fund. I’d also buy a home that allowed me to live below my means. Dave Ramsey recommends that your total housing expense should not exceed 25% of your monthly take home pay.

    http://www.daveramsey.com/blog/how-much-house-can-you-afford/

    Sorry for the long rant but I’ve thought a lot about this subject over the years. Best of success on your continued journey.

    MB55

  2. Interesting point on the value of time when it comes to renting. I believe Mr. Money Mustache has a post about the real value of free time in one’s life being much higher than people think. And it is true, owning a house would be a much bigger burden in terms of taking up free time.

    I love that you brought Dave Ramsey into this. He makes a lot of good points about financing a home, and the 100% down payment is a tongue-in-cheek suggestion that has some real value.

    I really value your input — sounds like you have “been there and done that,” and that brings some serious experience to your posts. Thanks for commenting, I really enjoy reading your wisdom.

  3. My partner and I bought our house 2 years ago. Our mortgage and property taxes are right at what we were paying for rent. We converted our walk out basement into a studio apartment and rent it on Airbnb. We make at least our mortgage payment every month, if not more. If we ever decided we no longer wanted to live in our town, we could easily rent our house out for double what the mortgage is. For us, it makes so much financial sense to own.

    That isn’t to say we haven’t put a lot of money into it. We have-new roof, we’re currently renovating our bathroom and kitchen, plus the money we spent to convert the basement into a studio.

    We only looked at multi-family homes before we settled on our current home. We loved the idea of someone else paying our mortgage. If you’re up for it, and the numbers work out for your area, I would add investigating duplexes or triplexes to your research.

    1. What an awesome idea! We don’t have basements here in Houston, but using extra rooms or multifamily housing seems like a really cool idea. Best of both worlds! I wonder if it is strange sharing walls with your renter? I guess it greatly reduces the odds of them wrecking the place, considering the landlord is so close!

  4. I’m a renter and given the current situation with housing here in Australia (especially Sydney) with the prices being on average about 800k if it were up to me I’d continue to keep renting.. Having said that with the girlfriend it may be something I’d end up compromising on.

    For me it really depends on the goals, location etc of the people!
    Good luck in your search 🙂

      1. Yep, Sydney Australia is pretty ridiculous, it’s possible to get a cheaper one although it’s a lot further away from the city.. One thing that does make a difference is the average salaries, which would be between 60 – 70K here as well so it’s all relative.. Renting and then investing for me makes more sense although it’s not always about the numbers haha

  5. Jax,
    That’s a great idea to rent out space to cover your mortgage. I’ve considered buying a duplex over the years but in the end didn’t like the idea of renters being that close to me and dealing with knocks on my door at all hours of the night with complaints or repair requests. I do, however, believe that it’s a great way to get to your break-even point much faster because you are truly combining an investment within your primary residence. Kudos to you for making it profitable!

    As an aside, Clayton Morris talks about truly passively investing in real estate by owning rentals and paying a management company to handle all the details. I’ve been researching this concept as a way for me to further diversify and get into RE investing without the time commitment that typically goes with it.

    http://www.claytonmorris.com/

    Jef,
    You bring up a great point about your “girlfriend” and “compromise”. It’s a big part of the point I was trying to make about how the answer to this question really depends on how you “define quality of life”….. Your individual circumstances related to significant other/spouse, children, career, distance from work and family, how you wish to spend your time, etc. play into your choice whether to buy or rent as much as the financial considerations do.

    EI: if your significant other/spouse is adamant about owning a home because he/she values the privacy; the freedom to paint a room purple or put in granite countertop;, the ability to have 2 dogs, 2 cats and a chicken coop in the backyard then you either need to get on board with owning, speed up your timeline, lower your threshold on taking on debt, or go your separate ways. There is truth in the phrase “happy wife, happy life”. It also highlights how important it is that couples communicate effectively to get on the same page with regards to money, debt, investing, financial priorities, etc.

    So as you are aware MBF, your choice on the buy vs rent question has to be made with you and Mrs. MBF being on the same page. I imagine that for you to already have made such and aggressive declaration to become a MBF, you two have already hashed out and agreed to a lot of what it’s gonna take to get there. Wishing you well on your journey, as always.

    MB55

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