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Tuesday, November 15, 2011

Rent vs. Buy

Lately we've decided that now that we've paid off some pretty big expenses (goodbye doctor bills and student loans), it's time to start saving for a house.  It's led to some pretty in-depth discussions, and some revealing number crunching.  It's also made me revisit the saying I've heard countless times: "Renting is just throwing your money away."  I'd encourage anybody who thinks that to back off of their hard-line position and evaluate a few additional points.  Not that there's anything wrong with home ownership!  In fact, I would say that rent vs. buy is not strictly a financial decision.  There are countless other factors that do (and should) go into the decision to buy a home.  It's just ironic that the financial point is the one most people refer to. 

Case in point: 
I pay $600/month in rent for an 800 square foot 2 bedroom apartment.  This includes all utilities except for electricity.  My electric bill averages about $25/month.  Total cost:  $625/month to rent, or the monthly equivalent of $1.28/sf.  This means that I have a roof over my head, can pick up and move at any point I want to, have no upkeep or maintenance to do or pay for, am paying for equity on the behalf of my landlord, can not personalize the paint/layout of my apartment, have a wife that wants a house, and do not have a yard for the kids to play in.  I also do not receive the benefits from a tax system that favors home ownership (I cannot deduct any of my housing expenses from my income). 

In the area we live in, the average starter home is about 1,600 SF and varies between $140,000 and $200,000 in cost.  The current mortgage rate 4% for a 30 year loan.  If I wanted to get a house at $180,000 and put down 3.5% of that ($6,300), I could get a monthly payments at $829.  Then I would have to add mortgage insurance (new legislation calls for a minimum of 5 years paying PMI) which would be approximately 1% of the home's value, or $1,800/yr.  This adds $150/month.  I also would be responsible for paying taxes, which would compute to approximately $1,200/yr.  This adds $100/month.  On top of that, I would have the base utilities (water, sewer, trash, etc), electric, and gas to pay for.  These are also variable, but would average around $200/month for all of them.  The total now is $1,279/month without factoring in having a savings account for upkeep and maintenance.  If my starter home is 1,600 sf,  I am paying the montly equivalent of  $0.80/sf.  This means that I have a roof over my head, can not move at any point I want to, have upkeep and maintenance to do and pay for, am paying for equity on my own behalf, can personalize the paint/layout of my house, have a wife that has a house, and have a yard for the kids to play in. I also receive the benefits from a tax system that favors home ownership (I can deduct many of my housing expenses from my income). I also may be able to take advantage of a first time home buyer grant. 

So- is it worth it?  I am looking at $1,279/ month for home ownership and $625/month for renting.  The difference between my monthly cost is $654.  What if I took that money and invested it?  Would I be better off in 30 years to do so?  At the end of 30 years, I would have  a $180,000 house if I bought the home.  If instead I chose to rent, and put $654 every month into a moldy sock under my mattress, I would have $235,440.  I have not factored in variable property values (which most likely will go up) or any interest which would accumulate on that $654/month if I invested it instead (which most likely would also go up as well). 

Granted, there are all sorts of other things to consider, but I feel pretty confident in saying that often times renting IS NOT throwing your money away.  I do have to throw in a word about opportunity cost.  There's a reason that home ownership is often called the American Dream.  Buying a house too soon can make it into the American Nightmare because of opportunity costs.  Buying a house too soon can limit the options you have for employment, career advancement, and greater earning power later on.  Delaying that house purchase years allows you to have the flexibility for a few years to chase the experience you need to get in order to be in the position you would like to be in later on. 

I'll still likely end up sometime in the next few years buying a house.  I'm just doing my best to balance several factors before I do.  Things I'll consider in my decision are timing, interest rates, family size, happiness of my wife, location, commute time, value, price, getting a "good deal", etc etc.  I just don't want to make the jump at the wrong time. 
One small tiny tidbit of info that might save somebody a few pesos someday.  Get your sewer lines scoped before you buy a house.  Most sewer districts will do it for free.  A free colonoscopy for your house could save you the $10,000 it costs to replace the sewer line. 


  1. I would have to agree with this post.

  2. What a great walk-through on the thought process of buying a house. Thanks to this blog, I have decided to remain living in my parents' basement and save my money! Thanks!