Should I rent or buy? Every 20-something faces this question after finishing school and facing the real world. My opinion: There is no wrong answer (although you may sense a slight bias toward home ownership).
For some people, it’s better to rent a home over purchasing, at least initially. You’re not responsible (at least as much as the homeowner) for things like repairs, new appliances, yard maintenance, upkeep, taxes, and more. And many people in their twenties simply can’t afford to buy a house until they’ve saved up for a while.
However, buying a home has several advantages. The biggest and most obvious: When you purchase a home, your monthly payments go toward building equity in something with value that can return some of your money when you choose to sell.
Our home ownership story
The decision to buy a home was tedious but exciting for my wife and I. We moved back to my hometown of Warsaw, Indiana, which has far fewer rental options than the larger cities we moved from. Like many people fresh out of school, we chose to rent for a year to save up for a down payment on a home.
During that time we debated between building our first home in a newer neighborhood or purchasing a slightly larger, 5-year-old house in an established neighborhood. We ultimately chose the larger one. Now we’ve been in our home for five years and have two kids. It’s starting to feel like a tight squeeze, so we’ll likely start this process all over again soon.
Get your assets in gear
You’ve probably heard some wise figure say that buying property is a good idea because a house or building is an appreciating asset. By definition, an asset is something with value. Most assets you buy depreciate, meaning that they decrease in value over time (example: a new car).
Purchasing property is a unique exception. Over time the housing market has steadily increased, meaning if you buy a house today it will likely be worth more in 10 years. For this reason, buying a house is a great idea — as soon as you can afford it.
Do you feel comfortable committing to a location for an extended period of time? Many financial advisors say three years is the tipping point. If you plan to stay in one place for at least three years, it will likely be cost-effective to purchase a home.
What’s up with financing?
If you’re ready to buy, you need to figure out how much cash you have for a down payment. It’s generally recommended that you have 20% of a home’s total cost for the down payment. If you can’t come up with that amount, the bank you borrow from is required to purchase mortgage insurance, which you pay for as part of your interest payment. It’s only an extra 0.25% APR (annual percentage rate) but if you borrow $200,000, you will pay an extra $500 per year in interest.
A general rule of thumb for what you can afford is five times whatever amount you are comfortable committing right now to buying a house. If you can commit $30,000 for a down payment, then your budget for a home is about $150,000.
Obviously the vast majority of us don’t graduate with thousands of dollars lying around, which is why we see far more young people renting. Urban and metro areas are seeing an explosion of new housing and condo developments for renters.
Compared to buying a home, you’ll likely end up paying more for a nicer, newer but smaller place. You get less square footage but a rental property often has nicer finishes and some even come with furniture. Another huge advantage for rental properties is location. If you want to live right in the middle of the action in a big or medium-sized city, buying a house is likely not an option.
For perspective, rent for an 800-square-foot, one-bedroom apartment in downtown Denver costs around $1,500 per month. For that same amount, you can finance a $200,000 home and pay it off in 15 years at a 4.0% APR financing rate. You could afford a $300,000 home for that same amount if you want to finance it over 30 years… assuming you can come up with the $40,000 or $60,000 down payment, respectively.
Ultimately, there is no wrong answer! You get to decide what’s best for you.
By Mitch Reinholt
Are you ready to buy your first place or are you more comfortable renting? Either way, take a good, hard look at your finances and start planning for your future.