My friend Jay Vorhees at JVM Lending wrote a blog about rent vs. buy analyses last fall that I think is still applicable to this current market. I’ve shared a shortened version of Jay’s post below, with my own two cents at the end. Let me know what you think!
Rent vs. buy analyses are often ridiculously misleading. A typical rent vs. buy calculator like Freddie Mac’s will look at the total cost of renting (including renter’s insurance) over a period of time against the total cost of owning a home over the same period of time (and accounting for closing costs, payments, appreciation, maintenance, etc.).
The analyses, however, are too “financial” and objective, and here are just a few of the things they miss:
- Forced Savings/Housing = Nest Egg! Housing payments are very effective “forced savings plans” because missed payments will destroy credit. Each payment is both paying down a loan and paying off an asset that will appreciate over time.
- Refinance Opportunities. There is a high chance of being able to refi into a lower rate, which rent vs. buy analyses never account for.
- Stable Housing Payment. Rents always go up, but housing payments are fixed. This is important especially now with rent skyrocketing in many places.
- Equity for Emergencies. Homeowners eventually build up equity (no matter what happens in the market) that can be tapped into for emergency needs like tuition, home repairs, medical bills, or temporary help if there is a job loss.
- Pride of Ownership. Young people who have recently bought homes love their homes and turn them into showplaces for their own enjoyment and for entertaining friends and family.
- Freedom. This is the most significant missed item. Homeowners really appreciate the freedom to renovate their homes or just do whatever the heck they want, really.
Kristin’s take: I am a firm believer in paying yourself instead of paying “the man” (like, somebody else’s mortgage for example). Of course, there are people who might move in a couple of years, just starting out, etc. where renting makes more sense. However, if you are young and start buying real estate and continue to buy investments over time, it will set you up 30 years from now!