Should I Buy Or Rent?

It sounds like an easy question, but in truth, the decision to buy or rent is often one of the toughest questions our customers ask.  The choice to buy is a big one, loaded with big personal and financial consequences, and it’s a choice that shouldn’t be taken lightly.  Here are some pros and cons for both sides of the question.  Scroll to the bottom for a financial breakdown and our “Buy Or Rent Calculator.”

Renting A Home

The vast majority of people rent for a long time before they ever buy.  There are good reasons for this: it’s usually pretty easy to find an affordable rental, there’s a lot of flexibility in where renters live and how often they move, and in most cases, renting isn’t a long-term obligation.

On the other hand, renters have little or no long-term control over their residence.  Things like painting the walls or owning a pet require owner approval.  Landlords can choose to raise the rent, not renew a lease, or even sell the house – often while the renter is still living there.

Owning A Home

Owning a home is a totally different animal.  Owners have a huge amount of security in their residence, and they know that it will be their home year after year until they decide to sell.  They get to choose whether to buy a dog, re-do a bathroom, or paint the kitchen hot-pink.

Mortgage payments are also relatively stable over time.  On a fixed-rate mortgage, the interest and principal payments – typically the largest portion of the mortgage payment – are identical each month for the life of the loan.  Rents, by comparison, tend to go up over time.

This is just one of the major financial advantages to owning a home – advantages that make real estate one of the best long-term investments a person can ever make.

A Rent Or Buy Comparison

Financially, renting is really simple – a tenant pays ‘x’ amount of dollars per month and gets a place to live.  Rents aren’t tax deductible, so at the end of the year, the total cost to reside in a place is ‘x’ times twelve.

The cost to own is a little more complex.  Most people pay their mortgage principal, interest, property tax, and homeowners insurance in one lump sum (commonly called the PITI payment.)  These four factors are comparable to the total rent payment in any given month, and they all have an effect on the actual cost over time.

Rent Or Buy?  Taxes and the PITI Payment Breakdown

In order to illustrate how owning a home can actually make money, it’s important to understand how the mortgage payment works.  There are four main factors to most payments:

(P)rincipal – The portion of the payment that goes against the actual debt.  Many people consider this portion of the payment to be ‘forced savings’ as it decreases the amount of debt in a mortgage.

(I)nterest – The amount of interest paid in a given month.  This portion is tax-deductible for both primary residences and investment properties.  Because most mortgages include higher interest charges at the beginning of a mortgage, these numbers will typically exceed the standard deduction on income tax from the IRS, creating a tax-shelter for homeowners.

(T)axes – 1/12th of the total annual property taxes levied by a state or county.  This is also a tax-deductible portion of the payment for both primary and investment properties.

(I)nsurance – 1/12th of the annual hazard insurance.  This cost is only tax-deductible for investment properties.

Financial Comparison

Let’s break this down over the course of six years.  The buy or rent chart below reflects a purchase home priced at $130,000 with a 3.5% down payment, a 5% interest rate, and annual taxes of $1,755, with average increase in price of 5% annually.  The rental side reflects an initial rent of $1,000 with rents increasing 3% per year.

Buy or Rent Breakdown

Buying Spent in
year 6
Cumulative spent
from years 1 to 6
Purchase costs
Down payment 4,550
Closing costs 5,200
Yearly costs
Mortgage payment* 6,940 41,316
Principal 2,375 12,626
Interest* 4,565 28,689
Condo/common fees* 0 0
Property taxes* 1,881 10,027
Utilities 1,325 7,570
Renovations 754 4,305
Maintenance 754 4,305
Homeowner’s insurance 801 4,271
Lost opportunity costs
Down payment/initial costs 392 2,166
Yearly costs 2,157 6,265
Selling costs
Closing costs 10,453
Remaining principal 112,824
Tax (if any) on profit 0
Proceeds from home sale –174,212
Year 6 totals $15,004 $39,039
Renting Spent in
year 6
Cumulative spent
from years 1 to 6
Initial renting costs
Rent deposit 1,000
Broker’s fee 0
Yearly costs
Rent 13,911 77,621
Renter’s insurance 184 1,025
Lost opportunity costs
Rent deposit/initial costs 40 222
Yearly costs 2,344 6,749
Leaving your rental
Return of rent deposit –1,000
$16,480 $85,617