Rent or Buy? A Simpler Approach

14 January 2008

Calculating the costs and benefits of home ownership versus renting is extremely difficult because many important factors involved in the decision are very difficult to quantify.

“I am a 48 year old divorced female. I have been renting for the last 10 years…My friends keep telling me that renting is "throwing your money away"… but if I buy, my monthly housing costs will probably double… I wonder if at my age I would not be better off putting the difference into a retirement account?”

Rent versus buy is a perennial issue, and a very complicated one. The decision is not properly made by looking at monthly costs – there would be few homeowners around if that is all they looked at. Homeowners build equity, which is part of their wealth, in many cases the major part. The equity can be extracted later in life by selling the house or by taking out a reverse mortgage. Or they can leave it in their estate for others to enjoy, if that is their inclination.

Usually I refer people who ask me about this to calculator 6a, Down Payment Calculator: Small Down Payment Now or Larger One Later (Rent Versus Own). which pulls together all the financial costs and benefits associated with any particular rent-versus-buy decision. Of course, this includes equity accumulation as an important benefit.

The calculator approach, however, has serious limitations. One is that an owned house and a rented apartment are not comparable in terms of amenities, location, responsibilities, and even associated life style. Trying to place a dollar value on these is very difficult.

The fact is that most homeowners make the decision to become a homeowner with their gut rather than their mind. Indeed, the decision often resembles the selection of a spouse more than the selection of a financial investment. We have all heard the statement, “I fell in love with that house.”

Reading between the lines of your letter, you have never fallen in love with a house and are content with your lifestyle as a renter. So be it. Don’t let anyone talk you into doing what your gut tells you not to do.

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