Two posts this week (here and here) about renting vs. owning have generated lots of lively commentary on the blog. Many commenters agreed that renting is wise in a down market, but not in the long run. I was struck by what commenter Ron had to say: “I do think in the majority of situations, buying a home is the wiser financial decision.”
Back then, homes were cheaper, and people tended to stay in them for their entire adult lives. Today, homes are much more expensive, and we move around a lot more, making homeowning riskier and more costly.
The New York Times has a handy buy. vs. rent calculator to help you figure out whether you should rent or buy in a given situation. It’s not perfect, of course: It requires you to make some predictions, such as how much homes will appreciate, how much rents will rise, and how long you expect to stay put. However, if you’re living in Los Angeles or another similarly pricey locale, the calculator will probably tell you: “Buying is never better than renting over 30 years.”
But no matter where you live, buying and owning a home is costly. Let’s say you’re buying a $300,000 home. The down payment and closing costs will run you $65,000. For a 30-year fixed-rate loan at 7 percent, your monthly payment is $1,596.73 per month. If you stay in the house until the mortgage is paid off, you’ll have paid $574,821.36 for your house in principal and interest alone. And we haven’t even talked about taxes, insurance, homeowners’ associations, maintenance, repairs, and upgrades — and the weekends and vacations you will have to devote to taking care of your home. (And lots of homes cost more than $300,000.)
I came across this great blog by a woman calling herself the Millionaire Mommy Next Door. She’s a self-made financial whiz who accumulated most of her wealth after she gave up her house and began renting. Here’s one of her posts that contains links to articles that challenge the notion that homeowning is a great investment.
Her point is that a home should be “a nest, not a nest egg” — in other words, a place to live, but not an investment, like stocks or mutual funds. The financials just don’t hold up. (She does, however, think that buying positive-cash-flow income property can be a good idea.)
I’m the first to say that there are lots of nice things about owning a home. You can fix it up any way you like; you can have as many pets as you like; you can provide stability for yourself and your children and put down roots in the community. I’m just saying that perhaps we should buy for those reasons, and not with the hope of making money. Once you’ve accepted that a home is, in fact, a money pit and not a money maker, it makes rent vs. buy decisions a whole lot more rational.