Renting vs Buying

March 9, 2009


Renting vs Buying

By
James Miller

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I saw this article on Yahoo about the benefits of Renting over buying a property. This fellow seems to make a broad statement that Renting is better. My take on this familiar argument is that it really depends on your situation.

1. It’s not apples to apples.
You can rent a decent two bedroom in the area where I live for anywhere from $600 to $750 per month.  A small, two bedroom house is going to set you back about $70,000 to $90,000.

Costs will be comparable on both.

But a house is not the same thing as living in an apartment.  Sure they are both “places to live”, but so is a cardboard box alongside the highway. You could argue pretty low living expenses for the cardboard box when compared to a house or apartment, but it’s a lot different.  Human taste and comfort comes into play. How much value do you put on not being packed into a building with other people? How much value on not dealing with a landlord or management company.
These intangibles make a difference too.

2. “Rent instead of Buy” pundits always make this mistake:

As Taken from the Yahoo Article:
“Houses looked like smart investments in 2007. They had returned 9.3% a year for a decade, while stocks had returned just 5.9%. This year, with investors fleeing both houses and stocks, both probably look like a waste of money.”

Sounds reasonable. Until you realize that the return on investment only makes sense if you buy your house all cash.  Since most of us don’t, you have to take into account the return on the amount you have in the house, which is usually the down payment plus some closing costs.  If we use numbers from his example and you are getting 9.3% on your $100,000 home, but only put 10% down You are getting an equity return of $9300, on a $10,000 investment, or about a 93% return.
Try that in the stock market.
I am sure it can be done…..under very speculative conditions.

3. The final thing to keep in mind is that too often people get more house then they need, and as of late can afford.  If you stick to a reasonably sized house for your needs, the payments are often comparable to renting, and the lifestyle is much more comfortable.

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