Conventional wisdom says that buying a house is smart and renting is a waste of money. After all, why would you spend your money paying down someone else’s mortgage? That’s just silly!
And if you plan on staying in your home forever, the conventional wisdom usually holds true. Buying will almost always come out ahead of renting over long time periods (assuming you’re comparing similar homes).
But most people don’t stay in their home forever and the conventional wisdom falls apart when you look at shorter time periods. Because the truth is that the up-front costs of buying a house are significant, and it’s typically several years before you can hope to break even compared to renting.
Which means that in many cases, it’s actually a smarter financial decision to rent than to buy a house. Let’s break it down.
Repeat after me: “My home is not an investment”
Before getting into the whole buy vs. rent debate, it’s important to put one big myth to bed:
Your home is not an investment.
Buying a house might be a good financial decision. I’ll show you how to run the numbers on that below.
But even then, all that means is that you’ll spend less money owning a home than you would have renting. It doesn’t mean that you made more money than you put in, which is what good investing is all about.
You can get all the gory details on why homes are not good investments here, but the bottom line is this:
- Long-term housing prices typically increase at around the rate of inflation, which means that the value of your home essentially stays still compared to the cost of other goods and services.
- Even if your house does appreciate in value, you can only access that money by selling your home or taking on more debt.
- It costs a lot of money to own your home. There’s the cost to buy it and the cost to sell it. Then there’s the cost of insurance, taxes, mortgage interest, maintenance, furniture, renovations, and the like. You’re paying a LOT of money beyond the initial purchase price.
The point here is that the buy vs. rent decision is really about which one will cost you less money over the long term. Neither one should be viewed as an investment.
Quick note: There’s a whole different conversation to be had about buying real estate as an investment property. That’s for another day.
When renting is smarter than buying a house
With that out of the way, let’s talk about three situations in which the conventional wisdom is wrong and it’s smarter to rent than to buy.
1. You want flexibility
When Casey and I lived in Boston, we knew that we might want to move to Florida in the near future. So we rented because it would be easier to leave a rental on short notice than to sell a house.
We eventually did move to Florida and again chose to rent because we didn’t yet know exactly where we wanted to be for the long term. Renting allowed us to spend some time in the area and get to know different parts of the community, with the goal of eventually buying a house in a location we knew would make us happy.
Simply put, renting gives you more short-term flexibility. You might have a lease, but they’re usually relatively short and there are often inexpensive ways to get out. And by keeping your cash in savings instead of putting it into a house, you have more money available to help you make quick decisions.
Owning a home comes with a lot more strings attached. There’s the cost and time that come with trying to sell your home, which can both be significant. And if your home has fallen in value, you may find yourself underwater on your mortgage at the exact time you’re looking to get out of it.
If you anticipate any big life changes in the near future and you’d like the freedom to make them on your own terms, renting could be the smart move.
2. You’d be left without savings
Buying a house costs a lot of money, especially up front. There’s the down payment, the closing costs, the moving costs, and the cost of new furniture and everything else needed to get it ready to live in.
If all those expenses require you to drain your savings, you could find yourself in a pretty risky financial position. What if your car breaks down or your child needs to go to the ER? Without a savings buffer, any unexpected expense like those could force you into debt.
I typically don’t recommend buying a house unless you can do so without sacrificing your emergency fund. Until you’re at that point, renting is likely to give your family more financial security than buying.
3. It’s not your forever home
If you plan on staying in your home forever, then this point is moot. Buying will almost certainly save you money compared to renting over the long term, as long as you’re buying a house within your means.
But if this isn’t your forever home, you’ll want to run the numbers. And the key question is this:
How long would you have to live in your home before buying becomes cheaper than renting?
There’s no way to get a definitive answer to that question, since it depends on a lot of assumptions about the future that we can’t know for sure. But the New York Times has a fantastic calculator that helps you get a reasonable estimate. Here it is:
One of the great things about this calculator is that is makes a lot of the default assumptions for you, making it easy to plug in a few numbers and see some quick results. But you can also dig into the weeds and adjust those assumptions for your personal situation, allowing you to get a more precise comparison.
Here’s how I would use it:
- Access the calculator here: New York Times Buy vs. Rent Calculator.
- Update the following variables based on the home you’re looking to buy:
- Home Price
- Mortgage rate
- Down payment
- Length of mortgage
- You can adjust the other variables as well if you’d like to get a more precise estimate.
- Adjust the How Long Do You Plan to Stay? variable and write down the equivalent rental price at years 1-10.
- Research the rental opportunities in the area you’d like to live and compare those prices to the list you just made.
- Using that information, you should be able to figure out how long you’d have to live in your house before it comes out ahead of renting.
Here’s a quick example using numbers from my area.
A 3 bed, 2 bath home might cost $275,000. Assuming you’re able to put 20% down and get a 30 year mortgage at 4% interest, here are the equivalent rental prices at years 1-10 according to the New York Times calculator, without adjusting any of the other variables:
- 1 year = $3,034 per month in rent
- 2 years = $1,874
- 3 years = $1,488
- 4 years = $1,295
- 5 years = $1,180
- 6 years = $1,104
- 7 years = $1,049
- 8 years = $1,009
- 9 years = $977
- 10 years = $952
Taking a quick look at Zillow, renting a 3 bed, 2 bath house in the same area of town would likely cost around $1,500 – $1,700 per month. Comparing that to the list above, you would have to stay in your house for about 3 years before it saved you more money than renting.
Of course, there are a lot of assumptions in these calculations and the break-even point could be shorter or longer depending on what actually happens. This is just an estimate.
And if I were really doing this, I would spend more time researching both homes and rentals to get a more accurate view of the market. I would also spend time researching the other variables like property taxes and insurance rates, since those would affect the final comparison as well.
This was just a quick run-through, but the process of making that list and comparing it to the cost of renting would be the same either way.
Making the best decision for you and your family
The real point here is that buying and renting both have their place. The idea that buying is always better or that renting is a waste of money is just not true.
So instead of buying into the conventional wisdom, I would encourage you to weigh the pros and cons within the context of your family’s personal financial goals. Run the numbers to see how long it would take for buying a house to pay off. And then make the best decision you can with the information you have.
There is no one right way to do things. There’s only what’s best for you and your family.