To buy or not to buy?
That is the question.
To clarify, we’ll solely be discussing the benefits and drawbacks of renting and buying of houses, however some information may pertain to other purchases, such as cars.
So to start, we’ll tackle the obvious benefits of buying a house, the one everyone loves to say when in the discussion of renting or buying: You build equity!
And you do. But the drawback that no one likes to mention is that in order to build equity, you have to take on a massive, massive liability. In accountant speak, you are now financed more by liabilities, and not equity. Your balance sheet doesn’t look very attractive immediately after taking out the mortgage, and it won’t look very good for quite a few years thereafter.
It takes years to pay off much of the principal (the portion of the mortgage that builds equity for you once it’s paid). For the first few years, all you’re doing is paying off a huge amount of interest expense. Essentially, the only actual equity in your house is the down payment and the small principal that you pay on the principal every month.
But You Don’t Build Any Equity At All When You Rent!
True, and that’s why we won’t be talking about that. Just because renting property doesn’t build you equity, doesn’t mean it doesn’t have any benefits.
And just to be clear, we feel that owning a home should be the end goal for anyone and everyone. But sometimes in the short term, some benefits of renting may outweigh the fact that you won’t build equity.
When renting, much of the repairs and maintenance of your apartment or rented property are handled by your landlord. The tradeoff for not being able to build equity is the ability to save on expenses. In essence, you are shifting the liability of ownership as well as the expense of maintenance and repairs onto the actual owner.
What we’re trying to say is, depending on where you are in life, renting or buying may be the best choice for you.
So Who is Renting For and Who is Buying For?
Just because a college kid’s parents are pressuring him or her to buy their first house and not “waste” the money on renting, that doesn’t mean it’s the best choice for them.
If you’re fresh out of college or trade school and starting a new career, you’ll likely have to put in a lot of hours working. Those hours may restrict you from having to put in the time and energy for regular maintenance of your home and you may lack the ability to pay for the expense of having someone else take care of the maintenance, such as a lawn care service.
If you’re young, lack the time for the maintenance, or lack the money for a down payment of a house, renting may be the best option in order to build up your bank account. The hidden costs of home ownership may outweigh the mostly upfront fees of renting a space.
But what do you think? What are your personal experiences with renting and how do you feel about a young couple trying to buy a house? More importantly, what tips would you like to give to them?
This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.