What You Should Consider When Deciding Whether to Buy or Rent

Happy Monday!

I hope you all had a nice weekend. Ben and I are in the thick of getting our new place move-in ready, so we spent a lot of Saturday and Sunday getting quotes on the work that we want done. After putting in the offer, finding the right financing, and closing, we still have a lot of work ahead of us before we actually move.

Stressor after stressor reminds me of the age-old question of whether it’s better to buy a home or rent. Historically, buying has been considered the “American Dream” and what everyone should strive for. However, what we experienced in the recent housing bust and the fact that Nobel Prize Winning Economist Robert Shiller thinks that real home prices (prices adjusted for inflation) may decline over the next 30 years, seem to suggest that a home may not be the best investment vehicle.

I spent a lot of time weighing the pros and cons before we bought our place. And if you find yourself in the same dilemma, here’s what you should consider:

Start with the numbers

From a financial standpoint, it’s easier to start your decision based on some hard numbers.

Simply put, you have to compare the average costs of owning versus renting an identical property for a specific time period (i.e., the period of time you plan to stay in the home). You then use those figures to determine which will save you more money. You have to take into account the mortgage, insurance, taxes, maintenance costs, and the opportunity costs of the money you save.

It’s probably easiest to use an online calculator like the one from Trulia or the NY Times.  These calculators, though, have you use assumptions that you can’t necessarily predict. You don’t really know what you will need to fix while living in the property, your rate of return on other investments, or how long you will live in the place.  Plus, they don’t take into account costs like Private Mortgage Insurance (PMI) or Homeowner Association Dues (HOAs).

In the long run, it’s probably still cheaper to buy

Overall, according to Trulia’s research, it’s still 38% cheaper to buy than it is to rent nationwide. But where you live plays a huge role in how small or large that discrepancy becomes.

I was astounded when we were in New York a couple of weeks ago, and we saw how much property cost in Manhattan. I was equally astounded by the amount of house we could afford in Indianapolis, IN (where I grew up) for the amount we we spent on a two bedroom, two bath condo here in Chicago. It’s all relative, so make sure you have a good sense of what’s going on in your area.

As with most things personal finance related, buying a house isn’t purely a numbers based decision. You have to take into account your personal circumstances to make sure buying a house will meet your needs.  Tune in on Wednesday for some additional considerations.