How to Decide Whether to Rent or Buy

Rent or BuyA couple weeks ago I offered a hypothetical renting vs. buying scenario and asked you to vote on which option was best.

Granted, it was a little unfair since I gave you limited information. And yet the responses were very insightful.

For instance, Bill Spaced makes the following observation:

I think it boils down — now — to your lifestyle. Buying a house versus renting a place is more about how you wish to live, your time horizon, how much you like a change in scenery, how much you like to garden and do upkeep, etc.

And Dawn McKeeth makes a similar observation. She says:

I also think a lot of it is a lifestyle choice. […] Personally, in the above scenario I would rent. With 4 kids more space is desirable and going through a transition period we aren’t sure where we want to “plant roots” just yet.

And finally, Autumn Beck writes:

Maybe I missed it but the #1 question is whether or not you have debt. It certainly is the better choice to rent until you are debt free but not the popular one.

So What Do I Believe?

The scenario I presented was from my own experience. Option #1 was the house I owned until early October 2007. Option #2 is the house I’m currently renting. Obviously, my action speaks for itself.

Here are the two choices I presented in the first post:

Option #1: Buy This Home

  • 1,398 square feet above ground
  • 400 square feet finished in partial basement
  • Mortgage payment: $1,553

Option #2: Rent This Home

  • 2,179 square feet above ground
  • 916 square feet unfinished basement
  • Rent payment: $1,500

Why We Chose to Rent

Up until 2007, I had never rented a property. When I got married, we bought a one-bedroom condo. We then bought the house described in Option #1 three and a half years later.

So why did we decide to rent all of a sudden?

Most importantly, I felt God told me to. So selling our house and moving was an act of obedience. But I’d be lying if there weren’t a few good reasons for doing what we did.

Reason #1: Falling home prices.

Homes are falling in value all around the country. And the volume of sales is dropping month after month, both in new home sales and resale properties.

For instance, a New York Times article published today reports, “At the current sales rate, it will take 11 months for builders to work off the current backlog, the biggest inventory pile-up since 1981.”

As I looked at our situation in late summer of 2007, I realized it wouldn’t have taken much of a drop to wipe out our equity and turn us upside down on our mortgage. (We had purchased the house with very little money down.)

Furthermore, I knew I didn’t want to live in the house long-term. Since we have three young children and I work from home, we felt like we needed more space. So we didn’t want to become “stuck” in our property because of a drop in home values.

Reason #2: Proximity to family.

With three children, we wanted to be closer to parents. My wife and I like to have regular date nights to keep our sanity. Being close to parents makes it easier.

Both my parents and my wife’s parents live in Parker. So that’s where we decided to move. (Becky Belnap points out that some families prefer not to be close to parents. She writes, “Some people NEED the space.”)

Reason #3: More space for less money.

The housing boom of the new millennium depressed the rental market in many parts of the U.S. And where I live you can often rent a larger property for less money.

It is not uncommon to be able to get 20% more space and save 5% to 10% on monthly payments.

Some will point to tax deductions as an advantage of buying. While that is true, renters save not only in payments, but also in home maintenance. I’ve personally enjoyed not having to worry about fixing things or improving the property.

Reason #4: Unsure of where to “settle down.”

Another reason we decided to rent was uncertainty about where we would like to live long-term. We’re definitely not in favor of moving around every year, but we also want to make a smart decision about where we plan to send down roots.

So renting gives us the freedom to “test drive” a neighborhood and get familiar with other neighborhoods in the area. For instance, having lived in our current neighborhood, I would not choose to buy a home here. I would not have gained that insight without living here on a trial basis first.

Reason #5: A desire to pay down debt.

As you already know, I’m diligently paying down debt and trying to become debt free. I felt that renting would put us in a better position to achieve that goal.

Some view a mortgage as “good debt” or sometimes even as an “investment.” I personally view a mortgage as a monthly expense. And a mortgage is debt any way you cut it. It just happens to come with a few potential benefits that other types of debt don’t have.

What I Dislike About Renting

My wife and I have the mindset of homeowners. We want to improve the property, to make things better. But we can’t. It would be a waste of time, energy, and money.

We’re finding it hard to suppress the urge to make improvements, even though it is keeping us from spending more money.

Another thing I dislike is the feeling that I’ll have to move again so soon. I really don’t enjoy moving. It’s a lot of work. And so I have this looming deadline that steals more mental energy by the day. Where will we move? What will we do? The uncertainty is, well, unsettling.

Why I’d Like to Buy a House Again

As I’ve already mentioned, I’d love to be able to not only THINK like a home owner, but also to ACT like a home owner. So I look forward to buying a house so I can make improvements and invest in the property.

I’d also like to be in a position where I don’t have to move if I don’t want to. And, ultimately, I’d like to send down some roots and become involved in a community. Not only for me, but for my kids as well. (It was particularly hard on my daughter when we moved because she was no longer able to play with her “best friend” from across the street.)

Hopefully, when the time comes to buy, I’ll be in a better financial position and the market will have mostly bottomed out.

The idea of buying a home and then watching $30,000 of equity go up in smoke is not pleasant. In today’s market, you could literally “lose” your entire down payment in a matter of months.

Some Guidelines for Renting vs. Buying

Consider renting a house when…

  • Home prices are falling.
  • It’s cheaper to rent than to buy.
  • You plan to move again within three years or less.
  • You don’t have a 20% down payment.

Consider buying a house when…

  • Home prices are rising.
  • It’s cheaper to buy than to rent.
  • You plan to stay in your home for more than three years.
  • You have a 20% down payment.

For more information about whether to rent or buy, you might want to check out Lynnae’s post There’s No Shame in Renting or FrugalDad’s post Attention Newlyweds: Rent a House.

So, for now, my choice is to rent. How about you?

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10 thoughts on “How to Decide Whether to Rent or Buy”

  1. You already know that we rent. Maybe someday we’ll buy a house, but I want to get out of debt first.

    Thanks for the mention!

  2. Yes, I feel the same way. I’d love to be out of debt before I buy a house. But who knows what God has planned! You’re welcome for the mention… you wrote an excellent article.

  3. Thanks for mentioning my article. I think renting is a logical choice in many scenarios, but people have been oversold on the idea of needing to buy a house when they really can’t afford one.

  4. Ryan, question (since you know a lot about this subject):

    I understand the whole issue with the drop in real estate. It’s not as bad up here in Canada, but still present.

    But if one was in a position to hold onto a home for longterm. E.g. 7-10 years, then, when the market goes back up, it could be worth as much if not more than it is now. Correct?

    It’s really an issue of buying, when you don’t know how long you’ll be sticking around, isn’t it?

    Or, buying, with the idea of moving to a better place in a few years, when you can afford it? E.g. if you can only afford a $90,000 home, so you take that, but it becomes a $45,000 in two years, when you want to sell and get a better place. Correct?

    So is the real issue that, if you don’t plan to stay where you buy until the markets re-balance, you’re going to lose a lot of money?

  5. John – You are correct. One of the biggest factors in whether or not to buy is how long you plan to stay in your house.

    But consider this:

    It may take longer than 10 years for the market to recover. This is not unreasonable, especially considering what happened in Japan in the 1990s. You can learn more about this issue in Financial Reckoning Day by Bonner & Wiggin.

    And consider this also:

    In the U.S., most home owners move every 3.5 years. I actually posted a question on Yahoo Answers to discover this. You can see my question and the responses here:

    How Often, on Average, Do Home Owners Move?

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