Renting Vs. Owning - Who Should Do What?

You've probably heard it a million times: "You should buy a house." The reasons include: "It's a smart investment," "It's a tax shield," and many more. The fact of the matter is that there are many hidden costs associated with home ownership that many people fail to recognize. And home ownership, like any investment, has its risks. Unlike investments in stocks, bonds or mutual funds people tend to sweep the associated risks under the rugs and, potentially, end up in bad situation.

For the first five years of home ownership most of the mortgage payment is applied towards interest. In fact, approximately 80% of a fully amortizing mortgage payment is interest for the first five years. Add in yearly maintennace costs (1-2% of home value), property taxes and homeowner's insurance and there's a high probability that you're either losing money or breaking even with what would have gone towards rent. Someone considering purchasing a home should consider the probability of moving within five years, the costs associated with moving and the costs associated with owning the home.

Many prospective home buyers are lured in by low interest rates. "I have to buy now while the interest rates are at all time lows!" is often the argument. Unfortunately, many other people have the same idea. This forces a lot of buyers into the market, thereby creating a seller's market and rapidly inflating house prices. When the rates increase again (and they will) buyers will exit the market and house prices will drop. This will decrease the value of the house that you paid a premium for. Now you're holding onto an investment that is worth less than what you owe for it.

Lifestyle is another thing to consider when deciding whether to rent or buy. Apartment or condo complexes often feature amenities like pools, gyms, etc. These types of buildings are also usually conveniently located to places of employment, attractions, night life and shopping centers. On the other hand, to have the same amenities in a single family home the costs would be astronomical. Social activities is another aspect of lifestyle that is associated with the decision to rent or buy. With apartment life there is typically more social activities available since single family homes tend to be in more suburban or rural areas.

In conclusion, renting tends to be the better choice for those that have a high probability of moving within five years like recent graduates or professionals that tend to transfer and single parents who don't have time for maintennance or money to purchase a home a in a desirable school district. Renting also tends to be the better choice for retirees who want reduced responsibility and more available capital. All in all, owning a home can be a good investment but one must weigh out all of the costs and benefits in order to make a more informed decision.