To rent or to buy a house is a dilemma most
people face. Let’s try to address this from a purely financial point of view.
Meet Joe and Alice. Joe wants to rent a house while Alice is thinking of buying one.
Image we have 2 similar houses available — one for renting and the other for buying. Joe
has to pay a thousand dollars a month to rent the house. Alice, on the other hand, needs
at least 300 thousand dollars to buy the house. For the sake of simplicity let’s assume that
Alice can get the mortgage for 6% interest rate – which is true in many developed countries.
And the loan she has taken is a repayment mortgage. Which means her monthly mortgage
payment will include interest plus a small part of the principal amount. Let’s say she
is planning to pay back the loan in 30 years and she also needs to contribute about thousand
five hundred dollars towards maintenance. We also assume that the property price goes
up by 2 % a year. You may noticed that in some parts the growth is much more than that.
But according to research over a large period of time, the rate is usually between 2 to
3 percent. If we use these assumptions, Alice will have
to pay about thousand five hundred dollars every months as repayment. On top of that
she also needs to pay for the house insurance. Joe, on the other hand, pays 1000 dollars
as rent. He also saves some amount of money in the bank. For argument sake, let’s consider
this amount to be the difference between the rent and Alice’s repayment amount. Since rent
is likely to go up every year, we need to consider a 3% increase in rent every year.
Quite often, people decide to sell their old house and move to a new one. In our case,
let’s say Alice wants to get a buy a bigger house in 10 years.
Considering the appreciation of the value of her house, her house will be worth around
370,000 dollars. Since she still owes money to the bank, she will be left with only 110,000
dollars Joe on the other hand will have savings of
about 130,000 after 10 years. Which means he made 20,000 dollars more by renting.
Does this mean that renting is always better than buying?
Not really! Let’s consider the case of Bob, who also bought
a similar house at the same time Alice bought hers. But he bought the house in another part
of the city. And the house increased by 3% in value per year – that is an increase of
just one percent than the house bought by Alice. When he sells the house after the same
10 years, he will make around 150,000 dollars. He made 20,000 dollars more than Joe by buying
the house! So if you ask me whether you should buy or
rent, I would say it really depends on your situation.
There are certainly advantages and disadvantages to both. If you rent you have more freedom
to move to another location. And if you buy you will have more freedom to modify your
house according to your taste. You can also see that if you invest the money
instead of saving, it will also change the scenario.