Rent/Buy? That is the Question...

The quandary of whether to rent or buy has been with us for a while, possibly ever since the first Neanderthal received his real estate license and began peddling cave space. While the pendulum has swung back and forth over the years, and a “definitive” answer has never quite remained that way, let’s take a look at the factors you should consider when pondering this decision.

Initial Costs – This includes any costs incurred required to get you into the house. When buying it means the down payment, insurance, and closing costs. For a rental, it includes advance rent, insurance, and security deposits. In most situations, the initial costs are much higher to buy.

Recurring Costs – As you would probably guess, recurring costs are those that must be paid on a regular basis. For a homeowner, it would be mortgage payments, condo fees, maintenance/upkeep, property taxes, insurance, etc. Keep in mind that a portion of these are tax deductible. For a renter, the two main recurring costs are monthly rent and renter’s insurance.

Opportunity Cost – This idea is slightly esoteric but has a huge effect on your wealth in dollars and cents. The big idea to keep in mind is that, when it comes to buying a house, the opportunity cost is the profit you sacrifice by putting a down payment on a house rather than investing the lump sum somewhere like the stock market. Yes, the house you buy is definitely an asset but it remains an unrealized profit until you sell. Thus, a down payment is considered an opportunity lost.

Net Proceeds – Let’s say you decide to sell your house at some point on down the road. The money you receive, minus closing costs, broker’s commission and fees, and loan balance to be paid off, reduces your net proceeds. For renters, the only thing they normally get back at the end of the lease is a security deposit.

On balance, a home buyer puts a big chunk of money into the deal up front, but hopes to get an even bigger chunk back, after appreciation, when he decides to sell. A renter doesn’t have to put much into the deal but doesn’t get much back. However, if he or she is a smart financial cookie, they could be investing that down payment money in stocks, precious metals, or real estate along the way.

Which approach is better? Sorry, folks, you’re going to have to figure that one out on your own. Each situation is too different for us to cover all permutations. We just wanted to give you something to think about. (Image: Flickr | Phil Sexton)

The JaasonHartman.com Team
"The Complete Solution for Income Property Investors"