The rent or buy question is very common today. But it's not property values or other tangibles that should concern prospective homebuyers. Instead, the question is whether a person should buy or rent a home.
When I taught at Purdue, many seniors in my financial planning class were shocked to hear my advice about buying vs. renting. Conventional wisdom has long argued that individuals should own a home when they can, and only rent when they must. I disagree.
Generally, if you don't expect to reside in a specific location for seven or more years, I strongly advocate most should go the rental route. Yes, property values have historically tended to move higher over time, but since 2007 home values have not followed the “appreciation” trend.
An even bigger issue relates to a home’s carry costs. When you buy a home, you know the purchase price and calculate the acquisition costs paid to the real estate agent and title companies. Real estate professionals will advise you regarding annual property taxes and insurance premiums. All of these costs are considered “carry costs” meaning they are paid every year because you own the property.
Costs for normal maintenance and unexpected issues must also be considered. Over a seven year period, you are likely to purchase a new water heater, furnace, roof or kitchen appliance. While these items need to be replaced, they don't really increase your home’s value dollar-for-dollar.
Another important consideration is mobility. Will you be able to move if a life event requires you to relocate? The most common reasons for an unplanned move relate to career transitions and marriage. Both are positive life events (hopefully), but they can also leave you in a lurch with your existing mortgage. Relocating is typically much easier when moving from a rental than a home.
Young homeowners may find it especially challenging to buy in a new house. Even if the first home can be rented out, the entire monthly payment will be included in the debt-to-income ratio while only part of the offsetting rental income is added to the income portion of the ratio.
At some point, the owner will again have to sell the property and the sales charges will be added to the transaction equation. If you think there is a good likelihood, you’ll live in a property for seven or more years; the purchase is often more than just a financial decision. Regardless, you should always do the math!
There are few things more enjoyable than creating memories in the family home. There's also nothing worse than making a payment on an empty house!