Rent vs. Buy

Rent vs. Buy

I’m saving my pennies for a down payment on a house. Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter. I have used a savings plan calculator to help get my act together.

Someday I hope to be a home owner, yet that someday may be farther away than I had originally planned. Until then, though, is renting a financially sound option? Am I really throwing my money away? I have to live somewhere and few places are truly rent-free. Shelter is a basic necessity, obviously, and my options range from unusual to traditional. If my husband were more open-minded, some of the more unusual ideas I listed below could work:

These choices are unusual and all would require paying for storage to contain all of our modern possessions. However, the cost of rent would be nil and would off-set the monthly storage rental fee. Until my husband begins to think abstractly (and I learn to hunt and gather), these ideas are out of the question.

So that brings me to the more traditional rental options; renting a house or an apartment. In Southern California, rent is almost as expensive here as it is in New York City or San Francisco. I think we rank 3rd as one of the most expensive cities to live in. A few years ago, when we rented the house we currently live in, $1,800 a month seemed like a deal considering homes in the surrounding areas were selling for over $500,000. Though home prices have sank by up to 35%, rent has remained the same.

Since we aren’t as close to purchasing our own house as we would like to be, my husband and I are now talking about making a lateral move: move into another, nicer rental house for about the same price. I’m tired of the exorbitant electric bills in the summer and winter due to drafty windows, the cockroaches crawling out from under our cabinets, and the crummy plumbing. However, this got me wondering if continuing to rent was a sound financial decision. How many millionaires rent their homes? How many financially sound individuals choose to rent as opposed to buying property? What would it mean to us financially if we continued to rent for another 3-6 years?

After a little research on the subject (there is a lot of debate on this issue with the majority leaning towards buying as opposed to renting) and some calculations using both The New York Times calculator and Michael Bluejay’s calculator, buying is a more financially viable option after year 5 or 19 depending on which calculation I use. As an example, I factored in what a modest home in a good neighborhood is averaging in my neck of the woods, $350,000 with only 5% down, compared to monthly rent payment of $1,800.

  • The New York Times calculator: I like that I can adjust the annual appreciation on a property and it determines if renting is more financially sound after 6 years versus 19. However, their complete analysis is a little light. The rent costs also seem a bit simplified. They approximate renter’s insurance costing $331 for 6 years and I pay more than that in one year alone!
  • Michael Bluejay’s calculator: His calculator has a better explanation of why it would be better to rent up to year 5. And that is only if the amount saved is religiously invested! His calculator also breaks down renting versus buying year by year.

On a side note, using Michael Bluejay’s calculator showed that when houses in my area were selling for no less than $500,000, renting was a much better option. Buying didn’t become financially viable until year 30! I feel very sorry for those people who are saddled with a mortgage of over $500,000.  At least I knew at that time that buying was completely out of the question and renting was a better option.

Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter.

Do you rent or own? Have you recently thought about moving, but can’t due to owning a home? Are you saving for a down payment and hope to purchase soon?