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The Rent vs. Buy Debate: Why Renting Makes Sense

by Shawanda Greene

Should I rent or buy a home?For years I’ve proudly rejected home ownership.

My argument goes something like this . . .

Real property is an illiquid asset that’s expensive to buy, sell, and own. Though some people garner good returns from leveraged real estate, many ultimately land in bankruptcy. That’s what happens when you have too much debt and too little money.

Some folks view a primary residence as an investment. Not me. If it don’t make me money or it don’t save me money, it ain’t an investment.

In high cost of living areas (like the one I reside in), the gap between the cost to rent and the cost to own is so big you can fit my ego in it. I’ll take my chances on the cheaper option: leasing an apartment.

By putting the cash I save from NOT owning in a low cost, diversified, ETF (Exchange Traded Fund), I can earn a greater return on my investment with less risk.

Over the last 120 years, U.S. home prices outpaced inflation by a half a percentage point. That ain’t much. Especially when, as a home buyer, you’re responsible for repairs and maintenance. Ugh. No thanks. I’ll have no part in this home ownership madness.

Yep. I guess you could say I had a pretty stank attitude toward buying a house.

And then . . . I started writing this blog post.

After digging around Realtor.com a bit and tinkering with a few online mortgage calculators, I started to reconsider my position.

In the current interest rate environment, the idea of owning a home isn’t so ridiculous.

Buying a Condo 

I am not a diva, but unless homelessness is an imminent possibility, moving to an urban ghetto or distant suburb aren’t options I’m willing to pursue. That means, if I can’t afford to buy in what I deem a suitable neighborhood, I’ll rent forever.

With that said, let’s assume I purchased a condo that’s similar in size and layout to my apartment. The hypothetical unit is located in the same area where I live now.

  • Property Description: 1-Bedroom, 1-Bath, 666 Sq Ft
  • Sales Price: $205,000
  • Down Payment of 20%: $41,000
  • Mortgage Interest Rate: 3.75%
  • Term: 30-Year, Fixed
  • Housing Payment (Principal, Interest, & Taxes): $923
  • Condo Association Fees: $275
  • Condo Insurance: $18
  • Utilities: $157
    • Electricity – $127
    • Water – $30
  • Effective Tax Rate: 18.64%
  • Tax Savings: So minimal I won’t bother calculating them.
  • Monthly Recurring Housing Related Costs: $1,373

Currently, I pay $1,075 for rent, electricity, and water combined. Renter’s insurance adds about $11 per month to the equation. So monthly, home ownership related expenses of $1,373 are only $287 more than my rent.

Assuming I could rent out my place for $1,350 per month, I wouldn’t lose too much money if I wanted to move out of the area or move into a larger space.

Still, I can’t count on the unit staying 100% occupied. Not to mention, the condo board may prohibit me from renting the place. Oh, and let’s not forget the ridiculous condo special assessments that pop up from time to time.

Buying a Single-Family Home

Although condos seem more affordable than single-family houses, their values grow slower in an up market and decline faster in a down market. And if getting rid of a home isn’t hard enough, on average, condos take longer to sell than detached dwellings.

  • Property Description: 3-Bedroom, 2-Bathroom, 1,400 Sq Ft
  • Sales Price: $500,000
  • Down Payment of 10%: $50,000
  • Home Loan Interest Rate: 3.75%
  • Term: 30-Year, Fixed
  • Housing Payment (Principal, Interest, Taxes, & Insurance): $2,483
  • Homeowner’s Insurance: $166
  • Utilities: $314
    • Electricity – $254
    • Water – $60
  • Effective Tax Rate: 18.64%
  • Tax Savings: ~$240 per month for the first year
  • Monthly Recurring Housing Related Costs: $2,963 (Excluding tax savings)

Whoa. Almost $3,000? Even with the tax savings, I’d put $2,723 each month toward housing related expenses–about $1,600 more than what it costs to rent a small apartment.

Notice in this scenario that I went with a down payment of 10% instead of 20%. Frankly, I don’t have $100K lying around to tie up in a home.

Even if I were still working as a controller, it looks as if I wouldn’t be able to afford a single-family home.

BUT, what if I used my house more like an investment than a personal asset? Remember we talked about that earlier?

Offsetting the Cost of Home Ownership

Y’all know how I do. Before I signed the closing documents, I’d have an ad up in the “rooms / shared” section on Craigslist. Realistically, I could probably rent each extra bedroom for $700 a month. After taxes, I’d net about $1,140.

With my new backyard, I’d generate income doing something I can’t do as a renter: dog boarding. If I took in two dogs 50% of the time, I could earn almost $500 extra per month after giving Uncle Sam his cut.

With the additional $1,640 from renting my place to humans and non-humans, I’d close the gap between the cost to rent and the cost to buy.

Of course, my plan would only work if nothing in my house ever broke, my roommates always paid their rent, they never moved out, and dog boarding is as lucrative an endeavor as I hope.

Conclusion

In case you missed it, I quit my job at the end of 2011. Right now, I can barely afford to buy a mobile home let alone a property that’s permanently fixed to the ground.

So yeah, I still wouldn’t buy a home. Plus, you know how I feel about debt. I don’t care how many financial gurus lump a mortgage under the “good debt” umbrella. It’s a crap load of debt, and, personally, I don’t care for it.

Now, I can’t say I’ll never take out a home loan to buy a primary residence. Clearly, under the right circumstances, purchasing a home is a wise move. But until I replace the income I walked away from, I’m a happy renter indeed. :D

What do you think? Is it better to rent or to own?

Did you enjoy this article?
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{ 19 comments… read them below or add one }

Holly@Clubthrifty.com July 13, 2012 at 11:46 AM

It sounds like renting is more affordable than owning in your area.

Where I live, its exactly the opposite. It is much cheaper to own than rent here!
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Shawanda Greene July 23, 2012 at 2:05 PM

I think buying a house in a lot of areas is pretty affordable. If I still lived in Orlando, Florida, I wouldn’t even need to perform the calculation to determine if buying made sense.
Shawanda Greene recently posted..Where to Put Your Emergency Fund . . . SpecificallyMy Profile

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Kathleen @ Frugal Portland July 13, 2012 at 1:29 PM

In DC it is probably always going to be better to rent, unless you find yourself some sort of K St consultant position! In Portland, my goal is to buy a multi-unit building for $500K and rent out part of it. But yeah, I need to save up at least $80K for that dream to become a reality.
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Shawanda Greene July 23, 2012 at 2:07 PM

There are a few neighborhoods in DC that are somewhat reasonably priced. They’re in the process of being gentrified so I’m not sure I’d be too excited to live there. For now, I’ll just wait until I can afford to buy in my preferred area.
Shawanda Greene recently posted..Where to Put Your Emergency Fund . . . SpecificallyMy Profile

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Financial Samurai July 13, 2012 at 5:53 PM

Definitely makes sense in your case to rent. Renting is freedom, baby! The only thing is, rent won’t make you rich or allow you to pass on anything to your heirs.
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Shawanda Greene July 23, 2012 at 2:10 PM

Nowadays, I think heirs are more concerned about receiving cash assets. They’ll probably sell your house anyway so by not buying in the first place, you just make it easier for your heirs to get access to the cash they wanted all along.
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Lance @ Money Life and More July 13, 2012 at 6:43 PM

I never thought I’d buy a house when I lived in Washington DC for good reason. Now that I live in Panama City Beach Florida I can own for about 30% cheaper than I can rent and I live 3 blocks from the beach. You really can’t beat that.
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Shawanda Greene July 23, 2012 at 2:12 PM

Must be nice. Maybe someday I’ll move out of the DC area. I’d love to stay here and own, but I also don’t want the bulk of my wealth tied up in a house.
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Charlotte @ Moneyinthe20's July 13, 2012 at 9:15 PM

Renting seems to be the right fit for you, but it’s home ownership for me. But then I live in Texas and owning a house is a good deal here.
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Shawanda Greene July 23, 2012 at 2:18 PM

Yeah. It looks like you can get a lot of space in Texas for a relatively small amount. Because of the high variable costs associated with a large home, I probably wouldn’t go too crazy on the square footage though.
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Paula @ Afford Anything July 17, 2012 at 5:27 PM

The rent vs. own question depends entirely on the values in your neighborhood — based on what you’ve described, it sounds like renting is the better deal, although if I were you and I were going to own, I’d opt for the condo.

You don’t want to venture into dog-sitting in the backyard; who are you going to pay to manage and market that business? Even if you do it yourself, you need to put a dollar value on that time.
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Shawanda Greene July 23, 2012 at 2:22 PM

With the dog boarding option, the point I wanted to get across is that the single-family home could be used to generate income more easily than an apartment or condo. Thus, it’d help pay for itself.
Shawanda Greene recently posted..Where to Put Your Emergency Fund . . . SpecificallyMy Profile

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Dominique Brown July 17, 2012 at 9:30 PM

For me I know a primary residence is a money pit. I can say without a doubt unless you live in an area where buying is cheaper than renting (D.C ain’t it) you are better off renting and investing. My primary residence cost me 30k a year before ulities, maintenance and upgrades. What people tend to forget when you buy a home is that you will want to constantly upgrade it. First year in my house I put on a 30k deck, then 2k in landscaping, then 30k in furniture.. it’s always something. If I was renting.. I wouldn’t care about upgrading. So, why did I buy a house? It was a lifestyle choice that I saved for and could afford. It’s no different than why I spent so much going to Europe. I could do it much much cheaper but I planed for it and that’s what we wanted to do.

Sidenote: I’m not sure why I used “I” so much in this response.

If I had to do it all over.. I would continue renting and bought more rental properties with the income I spent on my home. Then bought my primary residence in cash. But hey.. I was 23 when I bought my home.. and hindsight is 20/20 :-)

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Shawanda Greene July 23, 2012 at 2:29 PM

$30,000 a year?! Yikes! But as long as you can afford it, I guess it’s not a huge deal. If I moved into a house, I probably wouldn’t add much furniture to it. I’m kind of (but not really) a minimalist.
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Amy July 26, 2012 at 4:11 PM

It might be more expensive to buy in D.C., but I’m not sure that’s the case in Northern Virginia (NoVa). I bought a SFH in NoVa (Annandale) 10 years ago, refinanced a year later to a 15-year loan, and paid it off last fall. But even now, I think it’s cheaper in some cases to buy. I put in an offer on another house in the same neighborhood (though I didn’t get it) last week. The payments (PITI) on it would have been around $1400. I’m renting out my SFH for $2200 right now. What you’re not taking into account when you do your comparisons is rent inflation. If you buy a house, assuming a fixed rate loan, your monthly payments will be about the same throughout the life of the loan (taxes will most likely go up, but it’s a small portion of the payment). However, your rent will continue to climb, and you won’t have control over that. Of course, I’m not taking into account maintenance, upgrades, etc… As a homeowner, it’s always tempting to upgrade!

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mari July 27, 2012 at 5:24 AM

Great perspective and most of the blogs I read is about buying a house and not stopping you from owning one.
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Steve Zussino - Canadian Coupons July 30, 2012 at 5:13 PM

Renting makes sense in many cities – it is a tough call but you need to make sure you will live at the same place for at least 7 years (due to the costs involved in selling).
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lisbon apartments rent August 13, 2012 at 5:21 AM

In NZ, i also think that renting a house or apartment is much economical option than buying. Renting is also beneficial for tourists to cut cost of hotel and choose place according to their need. Anyways thanks for the tips!!

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