Introduction: Buy or Rent

Choosing whether to purchase or rent a house is one of the most important financial choices most of us make. It is essentially a complicated arithmetic problem where the prize for getting it right might be tens or hundreds of thousands of dollars — and the penalty for doing it wrong can be just as severe.

Fortunately, there are several tools available to assist you with arithmetic, like The New York Times’ great calculator. But, as someone who worked on that calculator and has spent a lot of time researching the economics of homeownership, I have a confession: There are certain aspects of rent vs. purchase that are critical but impossible to account for in monetary terms.

These dimensions have intrinsic but difficult-to-calculate values. They have to do with how owning a house frees you from worrying about rent hikes, drives you to save money, and provides you with certain tax advantages, and how renting frees you from the unexpected expenses of home maintenance. Anyone making a home choice should at least consider them before taking, or not taking, the leap.

Rents Protection Against  Rising

Assume you reside in a city that you find appealing and could see yourself living in for a long time. Assume you work in a field where you cannot reasonably expect your pay to rise significantly in the coming decades.

This strengthens the argument for purchasing rather than renting.

We don’t know what will happen to rental and housing prices in the future, either nationally or in any individual location. But one thing we do know is that rents and prices may rise in a certain location. It has occurred in New York and San Francisco since the 1990s; it happened in Los Angeles from the 1960s to the 1980s, and it might have happened in Chicago and Detroit a century ago.

Is it better to buy or rent?

The choice between purchasing a house and renting one is one of the most important financial decisions that many individuals undertake.

Buying a home is a way to lock in a low-cost place to live, essentially acting as an insurance policy against rising rents. If you rent, you are always in danger of your area becoming fashionable, bringing an inflow of people and high-paying occupations that raise your cost of living above what your salary can sustain.

Of course, your neighborhood may not be one of the new boom zones, in which case this insurance policy would be superfluous; you may even wind up in a place with dropping rents and housing prices, as Detroit has in recent decades. But that’s the essence of insurance: you may pay for it but not use it.

In addition, certain areas have rent control regulations that may safeguard long-term tenants. However, bear in mind that such restrictions are subject to change — and they may generate inflexibility, making it hard to relocate to a more acceptable property in the same neighborhood without incurring a significant rent increase.

Savings Compelled

Renting is often described as “simply throwing money away,” which is a bit inaccurate. You may also argue that when you purchase a house, the mortgage interest and property taxes you pay are a waste of money.

Less debt equals higher savings on a personal balance sheet, providing the home’s value is steady or growing. People in their early 30s who purchase a property with a 30-year mortgage and remain in it will possess a valuable asset free and clear when they reach retirement age. They could either live rent-or mortgage-free in retirement, or they could sell the property, relocate someplace cheaper, and have a good pile of cash saved.

In theory, one might use the same technique while renting, putting money into a savings or investment account while paying rent to a landlord. The beauty of owning is that it occurs automatically as a result of your mortgage payment. That means you’ll be less tempted to spend instead of saving in a given month; you can have access to it via a home equity loan, but you’ll have to make the active effort of going to a bank.

The Owner’s Hidden Tax Advantages

Assume you had a lot of money and were debating whether to purchase a house outright or put most of it in stocks and bonds and use part of it to pay rent on a house.

Renting may seem to make sense at first glance. The stock market, for example, has traditionally outperformed real estate in terms of return, so in principle, that portfolio might cover the rent while still continuing to expand significantly.

However, a tax law quirk tends to negate that benefit. When you invest money in financial assets, you must pay taxes on the returns they provide, such as the interest paid by corporate bonds, dividends given by stocks, or capital gains when you sell either for a profit.

When you purchase a property for your personal use, the return you get is mainly a place to live in rather than interest or dividend payments. It is also tax-free. This is referred to as “imputed rent” by economists, and it is one of the subtle benefits of purchasing that is difficult to account for in traditional purchase versus rent or buy calculations.

Maintenance cost volatility

All of these are peculiarities of homeownership that promote purchasing. But here’s an essential one that goes the opposite way.

Renters and landowners both pay for property upkeep; they simply do it in different ways with very different consequences.

If you rent, and your dishwasher fails, your landlord is responsible for repairing or replacing it. You may eventually pay the bill since projected maintenance expenses are included in the rent you pay, but there is no possibility of that sum fluctuating based on luck.

Homeowners, on the other hand, experience a tremendous degree of volatility rather than a fixed monthly payment covering the expenses of repairs and upkeep.

Begin with Cost Considerations.

Cost is an obvious consideration in deciding whether to rent or buy. However, it is critical to get a complete financial picture of how the two compare. There is always a tipping point as to when the cost of owning will be more favorable than renting, explains Agent Gina Ko of the New York City-based real estate business Triplemint.

In addition to the purchase price of a house, young professionals should consider the down payment, closing expenses, homeowners association or co-op fees, insurance, property taxes, utilities, and upkeep. These fees might vary greatly depending on the sort of property you want to purchase.

Think about the long term.

When considering the switch from renting to purchasing, young professionals should consider where their career path may lead them in addition to the cost. Ko says she often meets younger purchasers who aren’t sure where they’ll be in three to five years. A common compromise is to buy a condo to rent out if their career moves them in a different direction or to a different city.

Your career trajectory has a major influence on your renting or purchasing choices, says Shane Lee, corporate communications analyst for RealtyHop, and one of the most crucial variables to consider is how a professional shift may affect your income. Buying a house entails a significant financial commitment, and if your income is likely to vary over the next three to five years, it may not be the best time for you to purchase.