Buying or renting a home is not only about a good investment return.
Evaluating the appropriateness of a particular investment depends on your personal situation, risk tolerance, and time frame. However, determining whether you should buy or rent a home frequently transcends economic considerations. Deciding to buy or rent your home isn’t only a difficult monetary decision. Emotional considerations may also play a part in your decision-making.
Should you rent?
Renting might be better than buying, and if housing prices are high, you can possibly get more feet per dollar by renting. Renting can also be advantageous if your time frame is short. The legal fees and taxes involved in frequent property sales may diminish any profits earned from appreciating real estate. Cash-flow concerns are another reason to rent: do you really want to have a large portion of your net worth tied up in an illiquid asset?
Should you buy?
Renters bemoan that when they hand their landlord a check every month, they are throwing money away. But while it’s true that renting involves a recurring expense that can never be gotten back, it’s not clear that the money is being thrown away, since the renter is getting a real benefit: a roof over his head. Moreover, the renter can use his money for other investments rather than parking them in an illiquid property. Buying a home costs more than just the price tag: there are many hidden expenses, including the fact that you can’t invest your down-payment elsewhere.
However, owning property has non-cash benefits. The peace of mind that your landlord won’t ask you to leave, and that you’re the king of your castle are worth something.
Is there an easy formula?
Though your financial planner can help you figure out the financial answer to which may cost more, it is up to you to think about the psychological answer. Put the two facts together, and you can determine whether you should rent or buy.
Remember that you are buying a home first and an investment second. Even if your home depreciates in value, it will still protect you from the elements.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.