Buying Or Renting - Which Leads To Wealth?

[scubatim84]

Buying Or Renting – Which Leads To Wealth? | The Road To Wealth

Just finished penning an article on the pros/cons of both renting as well as buying. I also go over the current market conditions and how they push it pretty far in favor of buying as far as which is the better financial decision. Check it out!

[kork13]

This is an ever-present, hot button issue in the financial world, and no less so on these forums.

To your credit, you do highlight (unlike many others) what is probably the most important point in considering the buy vs. rent argument: It's all about the time of life someone is in. When you're young (and presumably have relatively low income & savings), renting makes sense, because you can't afford to buy a good house that is worth keeping for the long haul. It's only once you're older, with a decent income and accumulated savings, that you can (and should) buy a home.

The only critique I'll say is that you compare a $2000/mo rental payment against a $2000/mo PITI payment -- in most cases, the two will not be equivalent. A $2k/mo rental will get you much "more house" than a $2k/mo PITI. Generally, owning a house is more expensive in a short-term comparison, because PITI + maintenance/upkeep will cost you more than a same-sized rental. Over the long term, of course, you're building equity with those ownership costs, which is what makes ownership worthwhile.

[scubatim84]

This is an ever-present, hot button issue in the financial world, and no less so on these forums.

To your credit, you do highlight (unlike many others) what is probably the most important point in considering the buy vs. rent argument: It's all about the time of life someone is in. When you're young (and presumably have relatively low income & savings), renting makes sense, because you can't afford to buy a good house that is worth keeping for the long haul. It's only once you're older, with a decent income and accumulated savings, that you can (and should) buy a home.

The only critique I'll say is that you compare a $2000/mo rental payment against a $2000/mo PITI payment -- in most cases, the two will not be equivalent. A $2k/mo rental will get you much "more house" than a $2k/mo PITI. Generally, owning a house is more expensive in a short-term comparison, because PITI + maintenance/upkeep will cost you more than a same-sized rental. Over the long term, of course, you're building equity with those ownership costs, which is what makes ownership worthwhile.

Kork, I will agree that a $2,000/mo PITI may get you less than a $2,000/mo rent payment, but it really does depend on the market. I was actually drawing from my own experiences, where I went from paying $1,800/mo rent for a one bedroom apartment in Santa Clara to paying $1,800/mo for a two bedroom two bathroom townhome in Scotts Valley next to Santa Cruz. That $1,800 includes principal, interest, taxes, PMI and HOA dues. I don't recall what my homeowners insurance is a year, since it's bundled with my commercial and auto insurance, but it's not too much extra. So at least in the market I'm in, buying a home was actually cheaper. I would imagine in a lot of markets right now it is.

Now, just to leave no stone unturned, I do understand that Santa Clara and Santa Cruz are two entirely different real estate markets. It's not fair to compare rent in Santa Clara to Santa Cruz. However, rent in Santa Cruz is sadly not much different...to get a two bedroom two bathroom apartment, you're probably going to be spending about the same $1,800/mo. A lot of Santa Cruz is pretty run down too so it won't be as nice. So yes, you can get the same home (if not a better one) for the same rent payment, but this may be rare depending on the market you live in. I would never consider the markets in say Manhattan or San Francisco...just too expensive.

[bjl584]

It all comes down to what you want or can afford. I think that you can be financially successful in either situation if you are smart with your money. It makes sense to rent when you are young because you probably can't afford a home. It may also make sense to rent when you are old because you will be unable to handle upkeep on a home or you may just want to downsize.

One thing that I did notice is that the article makes mention of the rich owning real estate and putting this fact in the "pro" column for home ownership. Many of the rich do own property, but it is property outside of their primary residence. They own investment property outside of their home. So to say that one should consider home ownership because the rich own property isn't really the whole story.

[scubatim84]

It all comes down to what you want or can afford. I think that you can be financially successful in either situation if you are smart with your money. It makes sense to rent when you are young because you probably can't afford a home. It may also make sense to rent when you are old because you will be unable to handle upkeep on a home or you may just want to downsize.

One thing that I did notice is that the article makes mention of the rich owning real estate and putting this fact in the "pro" column for home ownership. Many of the rich do own property, but it is property outside of their primary residence. They own investment property outside of their home. So to say that one should consider home ownership because the rich own property isn't really the whole story.

Bjl, perhaps I should have clarified that (and I think I will go edit that right now) but in the book I referenced they were referring to primary residence. Most people who are rich do not rent an apartment to live in...they own a home. I'm not talking about the mega rich such as Mitt Romney or Bill Gates. I'm talking about the people who have a net worth of between 1-5 million. The majority of these people's wealth is in investments and they usually have one home, or at the most, a primary home and a vacation home.

[elessar78]

There is more than one way to build wealth and as long as you have a thought-out plan, your living situation should have no bearing on it as long as it's part of your plan.

If you buy in a gentrifying area then sure that can be part of your wealth plan. But if you buy in a desirable neighborhood at the top of the market then that's probably going to work against you.

If you're a renter by choice and save the difference in home maintenance costs, move to higher paying jobs constantly, don't mind the stigma then you can use that surplus income to build wealth.