Is it Better to Buy or Rent?

It's a good time to buy, but renting is better if you're not ready to stay put at least five years.

Buy and Rent Checkboxes on an Adhesive Note
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By Pat Mertz Esswein

If you're uncertain where life might take you next -- for a job, a relationship or just a change of scenery -- renting beats buying. It costs a lot less in terms of time, effort and money to break a lease than to sell or rent out a home that you own. Plus, the landlord is responsible for maintenance and repairs.

Buying can be a great investment -- or a lousy one, depending on the market where you live when you buy and when you sell. If you buy and home values go down, you may have to wait to sell to get back the money you invested in a down payment and mortgage closing costs (see advice on what it takes to qualify for a mortgage).

It usually makes sense to buy only if you plan to stay in your home for five to seven years. That's generally long enough to recoup the upfront cost to get a mortgage and the back-end costs to sell and pay an agent's commission. If you fit that profile, now is a good time to buy; most cities in the U.S. have recovered from the housing market bust that began in mid 2006, and mortgage rates are still superlow. Once you become a homeowner and prices rise, you'll be rewarded with the power of leverage -- you may put only 20 percent (or less) down, but you get 100 percent of the appreciation. Regardless of whether your home's value goes up, you'll benefit from the tax deductions for mortgage interest and property taxes if you itemize deductions on your federal tax return. And you will probably be able to keep up to $250,000 of profit tax-free when you sell ($500,000 if you're married and file your income taxes jointly).

If you're on the fence about buying or renting, take a look at the price-to-rent ratio where you live (the median sale price of a home divided by the average annual rent for a comparable one). In general, if the ratio is less than 15, the market favors home buyers; if it's more than 20, it rewards renters. Right now, the ratio nationally is a balanced 14.8, according to Marcus & Millichap, a real estate research firm. Ratios between 15 and 20 can go either way, depending on factors such as taxes and the potential for appreciation. The ratios in such millennial meccas as New York City, San Francisco and Washington, D.C., typically favor renters, but a spike in rents and low mortgage rates is tipping the ratios in favor of buyers. (For a look at the largest 100 cities, see Trulia's Rent vs. Buy Map and use the calculator to assess your situation.)

Even with your down payment in hand, landing your dream home could be a challenge, especially in markets where the inventory of homes for sale is low (often the same markets where rents are inflated) and the best homes attract multiple bids. What you can do: Get preapproved for financing to make your bid more attractive. And ask the seller's agent if you can get the home inspected before you make an offer so you don't have to include it as a contingency in the contract.

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Buying bad advice? Too much $$ for upkeep? Sure it costs to keep up, just like keeping up a car or even your body. But here's our experience: Bought house for $20,000; kept it rented over the years and contributed probably another $20,000 for upkeep. Sold for $100,000. Another: bought for $89,000. Kept for 20 years; sold for $195,000. A third: Eventually sold parents house which was purchased in 1964 for $42,000, in in the right neighborhood - following their deaths, we sold 40 years later for a million. Think long-term and you'll always be fine. When you rent you're paying someone else's mortgage so we landlords LOVE that. In fact, don't buy - keep renting and thinking short term; that helps make those of us who are landlords wealthier.

June 01 2014 at 11:51 PM Report abuse rate up rate down Reply

Have a home inspection before you make an offer? Are you CRAZY? I've been a CA Realtor for 21 years and you'd have to be a complete idiot to take that advice... while you're spending your $350 on an inspection, three other offers are on the table. Stupid advice. I trust whoever wrote this isn't using his/her own name.

June 01 2014 at 11:36 PM Report abuse rate up rate down Reply

Well all the folks I went to school with, seem to believe it's better to sell your shack to some unsuspecting moron, leave town and do it somewares else, all over again, called Capitalism I think, amazing how stuff works

June 01 2014 at 7:30 PM Report abuse +1 rate up rate down Reply

All said and done, be way cheaper in the long run, to just move in with your elderly parents and let them figure all this crap out.

June 01 2014 at 7:14 PM Report abuse rate up rate down Reply

I would say, ask a homeless person or family which they prefer, if you really want to get a grasp on the subject or situation. Or phrase it like- How doe's it feel after buying a home you could not really afford but the banks seemed to think you could, lost it during the housing bubble crash along with your job that was better filled by some terd in China? Wow talk about putting things in perspective. Any more stupid questions?

June 01 2014 at 7:02 PM Report abuse +1 rate up rate down Reply

Just rent, I have owned my house for 28 years and now all the slime that's moving in are ruining the place! When your area gets old all you get are slime coming in and more slime.

June 01 2014 at 4:08 PM Report abuse +2 rate up rate down Reply
1 reply to Jeanne's comment

Plus the cost of upkeep! I have lived in my home for forty years, the last 15 by myself and am really struggling to keep up with the repairs as my home ages. Time to sell and rent or move to a much warmer climate and possible allow someone else to take care of the upkeep and repairs.

June 01 2014 at 9:48 PM Report abuse rate up rate down Reply

Every few months an article like this appears somewhere and there is endless arguing about it. I urge you to google the "New York Times Rent vs. Buy Calculator". Put in the numbers and you will see... It gives you the ability to enter and or modify any cost you can think, maint, a "capital fund" for upkeep, opportunity costs on down payment, tax savings based on your own bracket, transaction costs to buy and sell, etc.

The upshot is that given typical appreciation, based on the last 100 years (roughly matches historical inflation of 2-3 percent, though obviously not smoothly) it makes sense to buy if you own the house for approx. 3 years, give or take. Less than that you should rent, generally.

June 01 2014 at 11:32 AM Report abuse +1 rate up rate down Reply

What people always forget to include in buying is the maintenance costs. If you rent and the water heater goes, it's the landlord's job to replace it. If you buy, and it goes, it's yours. And there are a myriad of other costs to owning that renting doesn't cover. Realtors will always say it's better to buy because that's how they make money. And they will usually try to get you to pay top dollar because that's how they get more money. To me, it's a conflict of interest. They aren't there to help you get the best deal, they are there to get the best commission. There needs to be a way to change from a commission based system. That's why the prices got ridiculous in the first place and why it will happen again and again. And also buyers are so stupid, they buy into the yeah, sell me that overpriced house. I gotta have it now, no matter how dumb it is. I also think that taxpayers should not be subsidizing home buyers. Buying a house is a choice and we shouldn't be subsidizing people's lifestyle choices. That's BS.

June 01 2014 at 9:33 AM Report abuse rate up rate down Reply
1 reply to d1anaw's comment

Completely agree with you. Why can't people think of the last 5 years when they think a house is a "good investment"? Yea, except for when the market tanks.

Three weeks ago I had a block in my main sewer line to the street - $3000. This week I had an electrical problem with my water heater that involved an electrician and rerouting wiring - $450. My house is 40 years old. I have owned it for 11 years and have spent thousands on repairs. In a few years, when the market is a little better, I am selling and renting. It's just not worth it.

And the tax issue? They use that to sell you on owning. Maybe a flat tax would wake people up about the money they are spending because "it's deductible".

June 01 2014 at 10:59 AM Report abuse rate up rate down Reply

Every one of these "buy a home" news features leads off with the same premise: "Buy a home if you are going to stay in the same place for 5 years." This is ridiculous. In these uncertain economic times, NOBODY knows where they will be ---- or what they will be doing in 5 years time.

In terms of employment, all you can be certain of is that you may have had a job, yesterday. But, tomorrow?? Who knows? And, if you lose your job and can't find another one, you are most certainly going to lose that house you bought while you still had a regular pay check.

When times get tough (as our current economy is), you need to circle the wagons and try your best to improve your financial situation. You won't accomplish this by signing up for a 30 year home mortgage (or even a 15 year mortgage).

Renting certainly isn't an ideal choice. But, it definitely makes a lot more sense than home buying does, in this scarey New Depression economy.

May 07 2014 at 4:02 PM Report abuse rate up rate down Reply
Melissa Li

If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you're spending a lot of money that could be invested instead. What's wrong with renting??

People should save their money until they have 20% or more. Cash only is ideal! Learn from the past people!

Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from 4AutoInsuranceQuote. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).

You live exactly like people did in the 1970's, and suddenly there's tons of money. Usually moderate earners can save $500 a month on these types of luxuries. May not seem like much, but it's usually the difference between being in financial trouble, and at least not losing ground.
My point is that it's so odd that people seem to forget all the little things we have, buy, use - that they didn't in the "better" times. That stuff isn't free.

May 07 2014 at 1:15 PM Report abuse +2 rate up rate down Reply
2 replies to Melissa Li's comment

@ Melissa --- You are right about all the hidden costs connected with home ownership. But people never think about those while they are house hunting. It's always: "How much is my monthly mortgage payment going to be?" And that is all they think about.

Re the other points you mention --- it is probably not possible to live exactly like people did in the 1970's. But, anyone can usually simplify their life considerably. The various forms of entertainment are almost always the second biggest household expense. (The first one is housing costs.)

You need to have a decent safe place to live. But --- blowing $$$ on entertainment, every month, is something that you WANT --- not a genuine need.

May 07 2014 at 4:16 PM Report abuse +1 rate up rate down Reply

Google the NYT rent vs. buy calculator. Has every cost you mentioned, and then some, and obviously considers appreciation, which you dont even mention, and offsets many of the costs. Of course yo ucould argue that appreciation isnt guaranteed, and loss in value is possible, but then there is no point discussing this at all. Over the last century however, there has been appreciation, and in my opinion there will continue to be due to inflation and associated increase in replacement cost or cost of new houses.

June 01 2014 at 11:40 AM Report abuse +1 rate up rate down Reply