Is rent a waste of money? Yes! Absolutely! No questions asked! End of post. See you next week.
Rent is not, at least always, a waste of money, despite what you may have been told. So let’s talk about it.
Don’t Buy a House Because You’re SUPPOSED To
If I were to create a flowchart to tell you whether or not you should buy a house, the first question would be, “Do you want to buy a house?” If no, then don’t buy a house. If yes, you would be taken to a second question reading, “Do you really want to buy a house or do you just think you should buy a house because it’s the next step you’re supposed to take?” If you just think you should because you’re supposed to, again don’t buy a house.
See what I’m getting at here? Somewhere along the way buying a house became this thing we’re supposed to do. Go to college, get a good job, save up some money, use it to buy a house. (I suspect some of this mentality stems from people marrying younger, starting families at a younger age, and staying with the same job longer, but’s that up for debate at another time.) Today, however, many people in their 20s (and on up) change jobs frequently and move more often.
>Rent can buy you the freedom to do this. (Sure, you could buy a house and then rent it out if you move for a job a year later, but this depends on whether or not you want to be, or pay, a property manager and deal with those responsibilities.)
Pay Attention to your Personal Preferences and Circumstances
I am 6.5 years out of college and on my fourth job. I currently feel more secure knowing I have the freedom to move for a new job, opportunity, or adventure pretty easily. Owning a house would leave me feeling less secure. Right now, I value freedom and flexibility. Had I purchased a house right out of college, I would not have been able to take some of the opportunities I have over the last 6.5 years (living in Fiji for a year would be at the top of this list!). But this is me. We all have our own personal preferences, values, circumstances, and situations. These should be a big part ofyour decision.
I’ve heard other people say you should look to buy a house when you are preparing to have children. Again, this totally depends on your circumstances and preferences. Some of these friends knew children were a good indicator to them that travel would slow down, changes in jobs were less likely, and buying in a house with school districts and playgrounds in mind made sense.
Other people are fortunate to be able to buy a house shortly after college (or even later) and have stayed in the same area and continued to live in that house for several years. If you don’t have the clarity to know where you’ll be living for the next few years, that’s okay – keep renting. Just pay attention to your circumstances, not everyone else’s.
Buying is a Long-Term Game
From an investment stand-point, I do not recommend buying if you plan to own the house for less than 5 years, maybe even 10, depending on your financial situation and risk tolerance.
The reason is this: you do not want to buy a house, watch the market dip for a few years, find yourself needing to sell, and then having to do so at a loss because the market is down from when you purchased it. Giving the market enough time, 5-10 years, helps to ensure the house has gone up in value.
Keep in mind too, that you are mostly paying interest in the first several years of owning a house. Real equity in a house doesn’t come until later. Owning a house for only a couple of years is usually not a financially smart decision.
Buying a House is not the Best Investment
Over longer time periods, investing in the stock market will produce higher returns than buying a house. I don’t think buying a house should be thought of as a true investment.
Sure, once in retirement and when you no longer want a house, the house can then be sold and the proceeds (now that you own all or most of the house) can be used to fund a more ideal living situation in retirement. However, to really build up your net worth, saving and investing is likely to be much more profitable than buying a home. You certainly don’t want to get into a financial situation where you need cash, have no liquid assets, and then HAVE to sell your home – if you can avoid it.
Disclaimer: I’m not talking about investment properties.
A few final points:
- Buying for the tax break is not a good reason to buy a house.
- Just because you get approved for a loan of $X, doesn’t mean you can really afford $X. (You’ll almost always get approved for more house than you should buy.)
- On top of the costs to pay for the house, you also have to furnish the house, pay the property taxes, pay the maintenance costs, and regardless of if you’re in New York or Arizona, you’ll need to pay for home insurance. These expenses need to be factored in to determine what you can afford and how it will impact your cash flow.
- To be clear, I’m not saying you should never buy a house. HAVING to rent for your entire lifetime is not a good option either, but deciding when to stop renting and then buy a house is an important decision.
These are some of my thoughts on renting vs. buying. If rent BUYS you the freedom to take new jobs and opportunities I think that’s pretty valuable, so if you’re not sure where life is going to take you over the next few years, relax, and keep renting.
What do you think?