Sometimes I share posts that highlight the many costs associated with homeownership, and invariably people yell at me explaining that “RENT ISN’T FREE EITHER!” Well, sure. I don’t think anyone is under the impression that rent is free, so I don’t think that needs a thoughtful explanation. And while I never suggested someone should ALWAYS rent, I thought it would be a good idea to break down how to make that decision. Here’s the thought process I walk through!
• Are you debt-free? If not, pay off your debt first. Rent a cheap place and go HAM on your debt. If you saddle yourself with a mortgage on top of your debt you’re asking for trouble.
• Do you have a 20% down payment? If not, save it up first. Having less than 20% down payment will likely require you to pay mortgage insurance plus expose you to more risk of going broke in a real estate down turn.
• Do you plan to live there for more than 5 years? If not, rent. This one is just the math of the transaction. Realtor fees, mortgage interest, closing costs, etc will eat up any financial benefit of owning if you own for less than 5 years. You’ll literally end up with more money if you rent.
• Do you want to be a homeowner? If not, rent. Who says you have to live your life the way people expect you to? Dealing with broken toilets, failing roofs, huge down payments, more difficulty moving etc isn’t a requirement in this life. If you don’t want to be a homeowner, then don’t buy a house. The rules are fake.
But if the answer to all of the above is yes, then go for it! Financially, owning over a long period of time will put you further ahead than renting ASSUMING you buy the same amount of home you would have rented. That’s a big assumption though. Many people rent frugally then buy lavishly and end up house poor. So if you do buy, remember it’s still an expense and buy modestly and focus your investing dollars elsewhere.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
On December 29th, 2021 Vanguard Target Retirement Funds all dropped in share price by as much as 14% in a single day. In this article