Better to Rent or to Buy?

“Don’t trade houses or spouses.”

That’s one piece of financial advice I’ve heard over the years that I think will stick with me until I go home. It’s just plain catchy. The speaker’s meaning: If you want to stay out of debt and remain financially sound in your life, don’t do the two things that will crush you financially: divorce and constantly “trading up” on houses.

Stick with your house, he told us, because the transfer costs of buying and selling homes (realtors, mortgage fees, amortization, etc.) will drain you.

For many of us, though, it’s not a question of trading up on homes, but whether we should buy a home in the first place. Buy or rent? Which is better?

Well, there’s a handy graph in a recent New York Times Business section. It compares the costs of renting versus buying equivalent homes.

The magic number? 7 years.

If you stay in your home for 7 years, buying is better. It will cost you $5,314 less than renting, an average savings of $759 each year.

However, if you stay in the home for less than seven years, it would have been better to rent.

Now, there are lots of assumptions in the article (a 1% increase in home value each year, a 3% increase in rent each year, etc.), including the fact that they are comparing equivalent homes. That’s important because my experience has been that most of us don’t move from renting a three-bedroom to buying a three-bedroom. Instead, we’re probably renting something smaller (an apartment, a condo), so our rent costs are probably lower than the Times comparison.

And, it’s taking into account averages. I have owned three homes so far. I wasn’t in either of the first two for more than five years, but made money on both. That had a lot to do, though, with a lucky break in housing prices and employer moving benefits. Had I left this house before five years and born the transfer costs myself, I would have been under, no doubt.

So, if you’re considering buying a house because you are “tired of throwing away money on rent.” Check out the graph. You may not be throwing money away. And check out some Boundless articles on House-Buying 101 and Home-Buying Mistakes to avoid.

HT: Challies