Rent or Own a House
Photo by Toa Heftiba on Unsplash
When it comes to renting versus owning a home it can be a tricky question to answer depending on where you are in your journey to financial freedom. Let’s quickly go over some pros and cons of both and hopefully you will be able to decide which option is the best for your current situation.
The common belief about buying a home out there is renting a house or apartment can sometimes feel like you are just watching your money burn each month. Rent buys only the right to live in a place for another 30 days, it does not contribute to any form of ownership, equity build-up or investment. What this does is it leads many people to see renting a place as some kind of a temporary solution while you wait to buy a home of your own and save up enough for a downpayment. Having said that, in certain situations renting a home rather than buying one is often the best financial decision you can make.
Very often renting the house is going to be considerably cheaper than paying the mortgage on a home of similar value. While the money spent on rent is not an investment in the way that money spent on mortgages, the money you save by renting rather than owning could be put into the stock market which could be a great investment mechanism. When invested correctly the money in the stock market would yield much better returns than money invested in a home.
When you are young you may not have a lot of extra money to invest in the stock market. Since renting is a more viable option for younger individuals, putting the money you save by renting into the market is a great way to start investing while at the same time saving to buy a home when you are older. Especially in the current hot market, buying a home is rarely a decision based solely on investment potential. If you give more significance to the investing side of purchasing a home you will be better off in the long run. You should bide your time before buying a house until the real estate market goes down and the purchase makes financial sense.
This is why when you rent a home you are not only able to put the money you save into the market, you are also able to wait and watch on the sidelines until the market price of the house you would like to buy is below its true value. Of course, there is always a chance that you might be there for 30 years waiting for this thing to go below its true value and in a lot of markets that has been true for sure. It also makes sense to find a cheaper market somewhere in the middle of the country if your current situation allows you to do that and wait for the next aggressive drop while investing money in the stock market. It is especially a viable option for people who are young enough to wait for the housing market to go down and then rise back up. Homes bought during a different housing market are great investments but until the buying opportunity comes in you are better off renting in these expensive markets and investing your money elsewhere.
The golden rule is always to buy on sale. Follow this rule in every single investment you make including your home.
It is important to remember that in many instances mortgages are more of a liability for you than they are an investment. Mortgages can require you take out a massive amount of debt and the debt comes with interest that compounds in the same way that return on your investment compounds. It will drive you further into debt as time goes along. This is why for a house to present as much investment potential as possible you not only need to wait until a good buying opportunity comes along but also you need to wait until you can pay for a significant portion of the house in cash. You want to have a lot of equity in that house, so you should be renting until you build up enough cash to pay a large portion of the house upfront and lessen the amount of debt. Unless you are presented with some kind of extraordinary buying opportunity where you are able to purchase a house well below its true value you will be better off by investing your cash in the stock market for as long as possible in order to avoid the burden and liability of a large mortgage payment.
