2 Comments

  1. Chris@TTL
    January 28, 2021 @ 10:50 am

    Hey Chris! You’ve got a detailed analysis on buying vs renting here.

    Good job accounting for a lot of the variables that are often overlooked!

    Overall, I think that there’s no blanket statement that can really be formed to say renting or buying is “better”. And I think you came to a similar summary—it’s really going to depend on an individual’s situation.

    If we could imagine an ideal hypothetical where there’s a direct apples-to-apples comparison between renting and buying (imagine two units in the same location with identical construction), it’d be safe to assume that the better financial choice would be to purchase the home…but only if we could make a couple assumptions:
    1) The owner stays in the house long enough to recapture the value of the transactional costs (agent fees, transaction costs, etc)—which I think the average is 7 years
    2) Mortgage rates are less than the rental market’s profit for the region/unit

    That second point is important since loan rates are so low (we’re looking at a refinance around 3% right now). For folks to invest capital in a rental unit, they expect to earn some sort of a profit and it’ll need to account for their own debt costs (or opportunity cost if they paid in full). If we could assume a relatively efficient housing/rental market, there should be some profit in there for the rental unit owner which accounts for risk, effort to manage the property, etc.

    Really it’s this difference between mortgage rates and rental profit percent that slant the financial decision toward owning.

    But, and it’s a big but—this is an ideal comparison. In reality, individuals will put more value on certain aspects of the owning or renting experience:
    1) More flexibility in living location—ideal for renting—since they’re less concerned about my first point, recapturing the transactional costs of owning
    2) More control over your surrounds—ideal for owning—people like to customize their house; the layout, design, style, etc. where landlords often limit such refurbishment
    3) Desire to live in a specific place—could be either!—I think this point is often undervalued. Some specific locations ONLY have rental units or ONLY have places to own. If you’re deadset in living in a specific neighborhood, building, complex, or area, there might be only one choice.

    Of course there’s lots of other subtle, personal reasons and desires that skew the relatively simple financial math that underlies this. You mentioned things like the mental weight some people have about debt, or similarly, people who are worried about their landlord potentially kicking them out on a whim.

    It’s all very personal with each individual situation being a bit different. I think that’s why this is always a hot topic.

    I’m excited to see your analysis of something you alluded to in your post (and something I did as well on our post which you commented on)—how having no mortgage and owning your place means a lower cost of living on paper. By having a lower necessary set of monthly expenses, you’ll not have to realize quite so much income to pay for your life. That becomes very important when you have direct control over your income during retirement since many folks live off of capital gains.

    If you don’t have to realize quite so many gains to afford life, you might qualify for lower tax brackets/deductions, subsidies, or different programs. That’s where owning with zero debt can really pay off over renting, though it’s a pretty specific situation. Looking forward to your analysis of it!

    Reply

    • Choose Beta
      January 29, 2021 @ 12:11 am

      Chris@TTL –

      You brought up a huge point. Everything in this post assumes that the people never move and the home buyers only pay closing costs on the initial purchase. Every move makes home buying less attractive due to the added expense. Your second point is also correct. I mentioned in the summary that mortgage interest rate increases would make the situation less favorable but decided not dig into it at this time.

      I really don’t think you can put a price on the flexibility that renting provides and I have to admit I am a little biased on that front. We have 4 young kids and grandparents close by so we have no intention in moving in the next few years. For someone that is not tied to a specific job, and no kids in school, the tradeoff for the flexibility to move has to be a huge.

      I am definitely going to expand on the concept of low cost of living in one of the February posts so hopefully it goes well.

      Thanks for reading and taking the time to comment!

      Reply

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