Renting an apartment vs. buying a house – which is better? Most people strongly lean towards one or the other, but there are some falling in the middle, not sure which way to go. You might be renting an apartment right now, and wondering if buying a house is a good idea. Everyone is saying, “You need to buy a house.” In your mind, you are turning the idea over and over, trying to decide what direction your future will take. A house is a huge expense, but is it the cheaper option in the long run?
Perhaps you are currently a homeowner, and you are feeling betrayed by the American Dream. You are seeing paycheck after paycheck go towards your house, and not all of it goes to the mortgage. All those unexpected are adding up and you feel like you’re drowning in bills.
My wife shared an article with me recently. After reading it, she was concerned whether we were making the right choice to rent instead of own. I read the article, got to the end, and wondered where the content was. Queue a rant on the dumbing down of news. There was so little valid content in the article it was laughable, but it’s articles like these that generate fear, and the news machine thrives on fear. It’s enough info to scare you, but not nearly enough to contribute to rational and educated research.
I hesitate to share the article, because I hate seeing them generate ad revenue from such drivel, but it’s beneficial to our conversation so I’ll share it.
Self-made millionaire: Not buying a home is the single biggest millennial mistake.
The majority of the article is copy and pasted below. When you read an article to aid in decision making, look for the evidence to support the claims. Then, consider whether the evidence is valid. This may take additional research, but it’s super important if you are making life changing decisions based on it.
“If millennials don’t buy a home, their chances of actually having any wealth in this country are little to none. The average homeowner to this day is 38 times wealthier than a renter.”
Correlation does not imply causation. Owning a house does not cause people to be wealthier. Rather, most people that own homes are older and had more time to accumulate wealth. Additionally, it takes a certain amount of wealth to even consider being a homeowner, so these folks have wealth first and then the move into homeownership. Don’t fall for the manipulation of statistics.
“As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing. Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear!”
At face value, this is true. You could also spend nearly that much paying the bank for the privilege of borrowing their money. More importantly, home ownership expenses don’t end with the mortgage, and many expenses continue after the house is paid off. Maintenance expenses, property tax, and homeowners insurance continue after you “own” your house. Typically the first 30 years of home ownership will cost much more than a rental apartment.
If you plan well, you can take a portion of that savings, invest it, and at the end of 30 years, you’ll have a liquid asset that can be quickly converted to cash. These investments can be used at any time. What happens if you lose your job after year 15? You still have to make a house payment. If you were renting and investing your savings, you can use that savings to cover expenses during your rough patch.
If you want to get in the game of homeownership, start by crunching the numbers, Bach says: “Actually do the math. Look and see what things costs, starting with the smallest options. This way, you’re really clear on your goals and you won’t just say to yourself, ‘I’ll never afford this.'”
This is one of the only things I agree with in this article. Do the math for yourself. Here is an example of the numbers I crunched when considering the rent vs. own dilemma. This chart shows the real numbers of our first house, second house, and our current rental apartment. (Note: the first house was much further from my job, so I included gas for the commute.)
Click here for a copy of the spreadsheet so you can enter your own numbers.
A good rule of thumb is to make sure your total monthly housing payment doesn’t consume more than 30 percent of your take-home pay. He also recommends having a down payment of at least 10 percent, though more is always better. Finally, recognize that “oftentimes, buying your first home means you’re not buying your dream home,” Bach tells CNBC. “You’re just getting into the market.”
This isn’t bad advice, but the “housing payment” isn’t the best number to budget at 30%. Your “housing payment” is not representative of your “housing expenses“. I prefer the 50/30/20 budget.
- 50% for must haves (all the expenses you must pay each month to include housing payments, utilities, maintenance, insurance, car payments, car maintenance, and food)
- 30% for wants (eating out, movies, entertainment, cable tv)
- 20% for saving and investments
This will give you a better picture of what you can realistically afford.
The kicker to the last quote from the article says that your first home may not be your dream home. This implies you will be buying another home, and spending even more money for a more expensive house.
Lots of info here… I didn’t intend on going through the article in such detail, but I think it’s beneficial to break it down. I have one final recommendation when digging for factual articles — check the source. Many articles encouraging home buying are written by people/businesses who benefit from you buying a home. Banks, mortgage brokers, and realtors have flooded the Internet with articles supporting home ownership. Whose interests are they looking out for?
Another funny tidbit is the first line of the article includes a link to another article: Self-made millionaire: Don’t buy a home http://www.cnbc.com/2016/11/04/self-made-millionaire-dont-buy-a-home.html
Apparently even the “self-made millionaires” can’t agree in the own versus rent debate. This is because no single answer applies to every person/family.
The decision to rent versus own is based on a number of factors including:
- Level of income
- Housing needs
- Number of children
- Number of pets
- Ability and desire to do home maintenance and yard work
- Amount of free time desired
- Tolerance level for close neighbors (apartment) vs. neighbors that are hard to get away from (house)
- Life goals
All these and more must be weighed to determine the best option for your individual situation.