Should I Rent or Buy?

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Birgo

Is there a good answer to this question? We know a common belief – buy your home because you’ll pay it off over time, and in 30 years, you’ll have something to show for it. Renting is just throwing your money away, right?
According to CNBC, buying is the better option in today’s real estate market. When looking at the cost of renting over 35 years vs. the average price of a home in San Francisco, renting will cost almost a million dollars more!
Let’s take a closer look at that thought. In San Francisco, if you rented from age 25 to age 60, you would pay $2.5 million. On the other hand, you could buy a home for $1.6 million. It looks like buying a home is much cheaper, but there are a few things that this comparison leaves out.

The Real Cost of Ownership

When renting, you have a single home cost: your monthly rent. Buying a home, however, comes with a basket of expenses. First, the purchase price isn’t what you end up paying; add in 30 years of interest and your home will end up costing more than double what you bought it for. Insurance, upkeep, property taxes, and homeowners association fees will bring up the cost too.
So, on a monthly basis, what does the difference come out to? According to Nerdwallet, homeowners in Pennsylvania pay 63% more than renters each month. This is based on a median cost of ownership of $1,414 and a median rent of $868 within the state.
What does the extra $546 that PA homeowners pay go towards? The homeownership part, of course. That $546 a month will pay down the balance on your house. By pairing your monthly payment with a $25,000 down payment, you could own in 30 years a home that cost $100,000.

Is a Home an Investment?

Something isn’t right about this though- a home is supposed to be an investment, but by putting in over $200,000 over the course of 3 decades, you’re only getting $100,000 in home value. Yes, home prices could appreciate, but that’s speculative. Is there a better option?
If you were to rent instead of own, you could immediately free up that $546, along with all the other expenses of owning a home. You’ll also still have the $25,000 in your pocket that would’ve gone towards a down payment, but what could you do with that instead?
The simplest thing to do with this money would be to invest it in equities. To compare this investment, we’ll just consider a 3% dividend, which you could easily find. We’ll also disregard appreciation in the stock market, since we did the same for homes. By starting with $25,000 and putting in $546 each month, in 30 years you’ll have more than $370,000! In terms of guaranteed value, renting and investing takes the cake.
But for the sake of realism, let’s consider how much your house or stock portfolio would actually end up being worth. According to CNBC, US home prices have risen 6 times in value from 1970 to 2000. That means that a $100,000 home could be worth $600,000 in 30 years. Having put in $200,000 over those 30 years, your money would have gained 3 times its value.
On the other hand, in the same time period, the S&P 500 rose 14 times in value, gaining an average of 9.2% each year. At this rate, investing that $25,000 down payment and contributing $546 every month could leave you with over $1.3 Million in 30 years! With an even amount of speculation on both sides, renting and investing still makes more sense.

Takeaways

The difference between buying stocks and paying a mortgage: earning interest vs. paying interest. Anyone who brags about what they paid for their home 30 years ago is covering up their disappointment in missing out on stock market gains.
Look past the “American Dream” and think, does buying a home really make sense?

Birgo

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