In general, is it financially better to buy or to rent a house?

Question

I know this differs from country to country, from person to person (depending on how much you already have saved), but I'm curious about the simplest example.

Let's say I have little to no money.

I can:

• Get a loan and buy a house, or
• I can live for the rest of my life in rent and save the extra money (investing and stuff).

Which is generally the better option (financially)?

Answer 1

The general answer is: "it depends on how long you want to live there".

Here is a good calculator to figure it out: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

Basically, if you plan to move in a few years, then renting makes more sense. It is a lot easier to move from an apartment when your lease is up versus selling a house, which can be subject to fluctuations in the real-estate market. As an example, during the real estate bubble, a lot of "young professional" types bought condos and town homes instead of renting. Now these people are married with kids, need to move somewhere bigger, but they can't get rid of their old place because they can't sell it for what they still owe. If these people had rented for a few years, they would be in a better position financially. (Many people fell for the mantra "If you are renting, you are throwing your money away", without looking at the long-term implications.)

However, your question is a little unique, because you mentioned renting for the rest of your life, and putting the savings into an investment, which is a cool idea. (Thinking outside the box, I like it.)

I'm going to assume you mean "rent the same place for many years" versus "moving around the country every few years". If you are staying in one place for a long time, I am going to say that buying a house is probably a better option. Here's why:

• With a mortgage, at some point you stop sending a check every month. With rent, the payments never stop.
• At the end of the mortgage, you have an asset that is worth a lot of money (your house). You can sell it and travel the world, give it to your kids, etc. (EDIT: With the rent+invest approach, you would have your investment portfolio as a sizable asset. It is open to discussion which one would come out ahead.)
• With a mortgage, your payments are a fixed amount (unless you have an ARM). Inflation drives prices up over time, but your mortgage payment stays the same. In fact, inflation helps the homeowner by making the last mortgage payment "cheaper" than the first one. Rent prices tend to keep pace with inflation. Your landlord will probably increase the rent periodically.
• There are tax advantages to buying a house (in the US anyway). Your mortgage interest is a tax deduction. There are also tax credits for certain home improvements (e.g. installing an energy efficient A/C). You can't take advantage of these when you rent.
• Over the long term, home prices do go up (population is increasing, but there is a finite amount of land). I am not saying the house is a good "investment", but its value normally won't evaporate over 30 years like some other assets would. In terms of inflation-adjusted dollars, your house should maintain similar "value" over the years, as long as you stay on top of the upkeep (and your neighborhood doesn't become run-down).
• With a mortgage, you are paying interest to a bank, which some would consider to be a "black hole" just like rent. However, you can reduce the money you pay in interest by making extra mortgage payments. Making 1-2 extra payments at the start of your mortgage can save a huge sum of money over the life of the loan.

So what about investing? Let's look at some numbers:

• Investing in the Dow Jones Industrial Average would give you ~9% per year, with a lot of volatility (source).
• Mortgage rates are hovering at about 5% right now. (source)
• Seems like a good idea to invest, instead of taking out a mortgage, right?
• Now, add in an inflation rate of ~3% (source)
• Inflation erodes the effective stock market return, but it helps your mortgage payment by effectively making it cost less over time.
• Next think about taxes.
• That 9% stock market return is taxable income (which eats into your effective return), whereas the mortgage interest is a tax deduction.
• Inflation and taxes pretty much negate higher rate of return for the stock investment.
• Additionally, you have the inflationary impacts of a rent payment that increases over time.

So, based on the above, I say that buying a house is the way to go (as long as you plan to live in the same place for several years). However, if you could find a better investment than the Dow, or if mortgage interest rates change drastically, things could tip in another direction.

Addendum: CrimsonX brought up a good point about the costs of owning a house (upkeep and property taxes), which I didn't mention above. However, I don't think they change my answer. If you rent, you are still paying those costs. They are just hidden from you. Your landlord pays the contractor or the tax man, and then you pay the landlord as part of your rent.

Answer 2

Forget, for the moment, which will pay off most over the long term. Consider risk exposure.

You've said that you (hypothetically) have "little or no money": that's the deal-breaker. From a risk-management perspective, your investment portfolio would be better off diversified than with 90% of your assets in a house.

Consider also the nature of the risk which owning a house exposes you to: Housing prices are generally tied to the state of the economy. If the local economy crashes, not only could you lose your job, but you could lose a good part of the value of your house... and still owe a lot on your loan. (You also might not be able to move as easily if you found a new job somewhere else.)

You should almost certainly rent until you're more financially stable and could afford to pay the new mortgage for a year (or more) if you suddenly lost your job. Then you can worry more about maximizing your investments' rate of return.

Answer 3

There's probably no simple answer, but it's fair to say there are bad times to buy, and better times. If you look at a house and see the rent is more than the mortgage payment, it may be time to consider buying. Right now, the market is depressed, if you buy and plan to stay put, not caring if it drops from here because you plan to be there for the long term, you may find a great deal to be had. Over the long term, housing matches inflation. Sounds crazy, but. Even into the bubble, if you looked at housing in terms of mortgage payment at the prevailing 30yr fixed rate and converted the payment to hours needed to work to make the payment, the 2005 bubble never was. Not at the median, anyway. At today's <5% rate, the mortgage will cost you 3.75% after taxes. And assuming a 3% long term inflation rate, less than 1%. You have expenses, to be sure, property tax, maintenance, etc, but if you fix the mortgage, inflation will eat away at it, and ultimately it's over. At retirement, I'll take a paid for house over rising rents any day.

Answer 4

I just read through all of the answers to this question and there is an important point that no one has mentioned yet:

Oftentimes, buying a house is actually cheaper than renting the identical house.

I'm looking around my area (suburbs of Chicago, IL) in 2017 and seeing some houses that are both for sale and for rent, which makes for an easy comparison. If I buy the house with $0 down (you can't actually put $0 down but it makes the numerical comparison more accurate if you do), my monthly payment including mortgage (P+I), taxes, insurance, and HOA, is still $400 less than the monthly rent payment. (If I put 20% down it's an even bigger savings.) So, in addition to the the tax advantages of owning a home, the locked in price that helps you in an economy that experiences inflation, and the accumulated equity, you may even have extra cash flow too. If you were on the fence when you would have had to pay more per month in order to purchase, it should be a no-brainer to buy if your monthly cost is lower. From the original question:

Get a loan and buy a house, or

I can live for the rest of my life in rent and save the extra money (investing and stuff).

Well, you may be able to buy a house and save even more money than if you rent. Of course, this is highly dependent on your location.

Answer 5

An important factor you failed to mention is the costs associated with owning a home. For example, every 10 / 15 years, you have to replace your AC unit ($5k) and what about replacing a roof (depends on size, but could be $10k)? Not to mention, paying a couple thousand annually for property taxes. When renting, you never have to worry about any of these three.....

Answer 6

"Which is generally the better option (financially)?"

Invest. If you can return 7-8% (less than the historical return of the S&P 500) on your money over the course of 25 years this will outperform purchasing personal property. If you WANT to own a house for other reason apart from the financial benefits then buy a house. Will you earn 7-8% on your money, there is a pretty good chance this is no because investors are prone to act emotionally.

Answer 7

Property in general tends to go up in value. That's one advantage you won't get if you rent.