• fractalinfinite

Buying Home Vs Renting Home

Updated: Jun 1

Inflation

When you buy your home, there are fixed and variable costs. The fixed costs are mainly your mortgage - principal & interest. The variable costs are property tax, HOA, repairs & maintenance, etc... The mortgage is the biggest expense and if you get a 30 Yrs fixed mortgage the cost is fixed for the entire duration of loan. Let us assume your income is currently $100k and If the wage inflation is steady at 2% for the next 30 years, your income will grow to $181k. Your earnings grows, but your mortgage is fixed. But if you rent instead the rent grows along with your income and you need to hope that the earnings grows at least at the rate of rental inflation.

Buy Home Vs Renting Home
Buy Home Vs Renting Home

Your primary home is not an investment

Your home provides one of the basic necessities - Shelter. Your primary home will not generate a cash flow. There is a lot of emotional value in living in your home, which cannot be calculated mathematically. Math can only go so far and this is one of the scenarios it breaks. If you are not planning to sell your home, then it's technically not an investment.


Apples to Apples

When you compare the rent of a two bedroom apartment vs a single family three bedroom home, its not apples to apples. You should compare renting single family vs buying single family home. The mortgage comprises of principal and interest. Most likely the property tax will be covered by the tax deduction received for the interest. So an ideal comparison should be between rent and only the interest component of the mortgage.


Flexibility & Duration

Renting provides you the greatest flexibility to move. You can stay in short term rental and move as frequently as needed. If you buy a home and want to move, selling is going to be long process with great overhead.


Financial Freedom

Once you pay off your mortgage, only your property tax, repairs & maintenance remains. The biggest benefit of financial freedom is time. No amount of money can buy you time. Reverse mortgage is another great option to live off your equity. So you are one step closer to your financial freedom.


Leverage

Leverage is using borrowed money. Leverage is always a double edged sword. Real estate is a relatively stable market to consider leverage if you have time in your hand. The home value rebounds even from the worst crisis given adequate time. In most of the cases, there is 20% down payment and 80% financed with mortgage. In this case, the leverage is 1:4 ratio. If the home appreciates by 3%, your real growth will be 15% instead. If this level of appreciation happens over several decades, the returns will be exponential due to the power of compounding.


Forced savings habit

Your mortgage is principal and interest. The mortgage interest is comparable to rent, but your mortgage principal is comparable to investment / savings. If you have a savings mindset you are well off, but majority of the people spend according to the balance in their account and live pay check to pay check. Your mortgage principal builds a forced savings habit.


Financial and Emotional Consideration

The decision of buying a home or renting varies depending on both financial and emotional considerations of the individual person.

Buying Home

Renting Home

Pros

Cons

Pros

Cons

Financial Aspects :

Gain Financial freedom once you paid off the loan, if it's a 15 year mortgage you are one step closer attaining it. It gives a lot of tax benefits with growing Equity. Reverse Mortgage can help you live off the equity of home. The home appreciation in the long run gives Exponential returns.

Buying a home needs a huge down payment and if you opt for less than 20% down, there may be PMI (Private Mortgage Insurance) required, cost additional to your monthly mortgage payment until you reach certain percentage expected. The home price fluctuates according to the market conditions.

​ Very little Upfront Costs needed as compared to buying a home. No need to worry about Property taxes, HOA fees,Insurance (Renters insurance is low in comparison to the homeowner's insurance). Maintenance costs are taken care of by the Landlord. Being a renter, doesn't need to worry about market fluctuations.

Rents may vary depending on the Location and Landlords. Very little control over stability-Landlords may decide to stop renting or sell the home. There is no equity build up and tax benefits associated. There may be a need to move unexpectedly which creates a lot of pressure and moving and relocating costs.

Emotional Aspects :

You can be the proud owner of your home. Provides stability and Security as the time period lived is not decided by the Landlord. Freedom to renovate the home as you desire. The mortgage is fixed for 30 or 15 years if it's a fixed mortgage and it does not vary according to the Landlord or Location. It creates a forced savings habit which in return help plan finances much effectively. Once you payoff mortgage, it not only provides Financial Freedom. The biggest benefit of Financial freedom is time which money can't buy.

There are lot of recurring costs to be considered in addition to the mortgage payment such as Home owner's insurance, HOA payments, maintenance costs and repairs. The commute might be long if the home is not affordable in the location near to the workplace. Longer commute may reduce the time spent with family or doing the activities in their desired Neighborhood. Doesn't have the flexibility to move places as in rental homes.

It provides a lot of flexibility in choosing the neighborhood (Schools, Parks, Amenities, Entertainment) where the home buying is not affordable. Ability to choose home near the workplace which in turn saves a lot of time in commuting. Enables to spend a lot of time with family while reducing commute time, Flexibility to move locations according to their jobs, schools, classes etc.

Doesn't provide Stability or Security as the time period rented is not decided by the renter. The lack of Stability and Security may impact the peace of the Family as the living conditions are uncertain. Don't have the freedom to renovate or make alterations on the home as you desire. The rents may go up suddenly or there may be a need to relocate which not only creates emotional burden ,it reduces the peace of the family. It doesn't create a forced savings habit like paying of mortgage (increases equity) , which may not be helpful in achieving Financial freedom.

On the whole, Buying a home benefits a lot if you decide to stay long term. The choice of buying a home or renting a home depend on various factors depending on the choices of an individual, Financial situations, long term visions and goals of an individual, risk factors that are able to be handled. Every situation is unique.


#rental #inflation #equity #mortgage #tax #investment

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