A reader wants to know if rent is really "throwing money away."
Question:My wife and I are new to the area and wondering if we should jump right in and buy a house or rent. I hate to rent because I think we are throwing our money away. What do you think?
Steve Rhode answers…
I can certainly understand the idea of pride of ownership and the desire to buy a house to feel like you have a place that is all yours.
On a more practical note, let’s talk about the reality of ownership. Unless you pay cash, buying a home results in a big mortgage on the property. You really don’t own the home. The bank has a huge lien against the property and can take the house from you if you don’t make your payments.
A real estate lawyer gave me some advice years ago that makes it very clear what my rights are as a homeowner with a mortgage. He said, “You’ve got to pay to stay.” If you really owned the property, nobody could kick you out.
Home ownership comes with a whole host of other obligations as well. You have the upkeep and maintenance of the property, maybe some homeowner dues, taxes, insurance, and then there are those dreaded household emergencies that cost a fortune. There is never a good time for your hot water heater to go or a tree to fall on the house.
Owning real estate can have some long-term advantages, like appreciation (hopefully). However, you also have to consider how much of a return on your investment you will receive before you have to or want to sell the home. Real estate commission costs add up to big bucks. And speaking of those costs, let’s not forget all the closing costs associated with getting the mortgage to begin with.
Renting on the other hand can be significantly less expensive when you consider all the above costs. You should stop thinking of renting as throwing your money away and start thinking of it as possible less expensive housing that gives you flexibility.
When you are new to an area you don’t always know the final place you’d like to live. After being there a while you might just find a certain part of town works better for your needs or commute. Spending a little time to get to know the area before you leap into a purchase makes sense.
A general rule of thumb is if you don’t plan on living in a place for more than five years then renting might be the best bet financially. But another consideration is to consider how much money you’d lose buying and selling a property in a shorter period of time.
Renting has a cost. If you rented a house for $2,000 a month for four years you’d pay $96,000 in rent. So you’ll need to consider if you bought and sold a house, with all its associated expenses and broke even, you’d come out ahead $96,000 in rent you did not have to pay.
The flip side is if the home did not appreciate enough to pay the selling real estate fees and costs then you’d have to come up with extra cash to get out of the house. In this case, renting has a cost but more flexibility.
For more on this subject, see this article and use the buy vs. rent map to see what the recommendation is for your specific area. if you decide to rent, check out 7 ways to beat the high cost of rent.
Steve Rhode is the Get Out of Debt Guy. He’s been helping people with personal finance troubles through advice and education since 1994. If you would like to ask a question, visit Get Out of Debt and let Steve help you for free.