Is It Better To Buy or Rent A Home in 2023?
The average cost to rent over a lifetime is well over a million dollars and you’ll pay over $2 million to rent in California or New York. Buying the average home at $440,000 will take you decades and cost over 1.2 million dollars with interest in taxes.
Buying Versus Renting
Buying versus renting your home is the most important financial decision you will ever make. It’s a decision my family recently had to make on our move to Tampa, and it’s one you’ll have to make at least once in your lifetime.
Now I’ve said before that buying makes no sense by the numbers but it’s still the right thing to do financially. For most people, buying a home is like a forced savings plan that can help you save hundreds of thousands of dollars for retirement or at least that used to be the thinking.
Right now, something is happening in the housing market that has never happened before. Something we didn’t even see in the housing bubble and it’s totally changing the answer to buy versus rent.
The housing market just flipped. I’m going to show you how that answer has changed, and the pros and cons of both buying and renting to know which is right for you.
The nerd in me always wants to answer these kinds of questions with the numbers but sometimes it’s not that easy. Buying a home is worth about a five percent return from not having to pay rent.
You also get that price appreciation which has averaged just under four percent but then you have to pay property taxes and maintenance. When all is said and done, the return on home ownership works out to be around 5.25 a year.
Compare that with the eight percent annual return you get from investing your money in stocks or the 12% return in tech stocks, and the answer should be obvious.
Just rent your home and put that down payment into the market instead. But while buying a home instead of renting looks dumb on the numbers, it’s actually one of the smartest financial decisions most people can make.
That’s because people are horrible at saving money. Yeah, I said it. Let’s be honest there folks, given the choice between saving even for retirement or buying that cappuccino, most people would wash it down with a dozen donuts as well.
But now when you buy a home, you’ve got that monthly mortgage payment that’s like a forced savings plan with every payment you’re adding a little more Equity that you can someday cash out.
Well, that’s what I used to think but this year everything changed. The housing market has been turned upside down. Now let’s back up a little bit because I want you to understand the pros and cons of buying versus renting.
With buying, you do get that forced savings plan a built-in investment even the worst shopaholics can count on for retirement. You also get that pride of ownership and the stability that comes with it.
Some studies show homeowners are actually happier than renters. You also get deductions on your income taxes for interest and property taxes. Of course the downside to buying a home is you’re kind of at the mercy of the market if you need to sell fast.
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With renting a home, though, you can pack up and move if you don’t like the neighbors. You’ve also got a predictable monthly expense when the air conditioner breaks and it feels like you’re cooking people burgers in the middle of June in Phoenix.
You just call the landlord instead of draining your bank account. Investing that thirty thousand dollar down payment in stocks at an eight percent annual return grows to more than three hundred thousand dollars over 30 years.
Buy a home though and you’re going to lose nearly two hundred thousand dollars in difference on your returns. Now the downside of renting is you’re always going to be at the mercy of your landlord.
Most states have no laws limiting how much rents can be raised or landlords can always decide to sell the house. Now if you do decide to rent, how would it feel to have your dividend stocks pay for your rent?
According to the Wall Street Journal, the housing market is seeing something that hasn’t happened in more than 40 years. Not even during the last housing bubble was it this bad and it’s causing one in five home buyers to back out of their contracts.
In July alone, people that already signed to buy a home said nope. This changes the decision and it could also be one of the first signs of another crash in real estate.
The interest rate on the 30-year mortgage has doubled to over six percent this year and home prices have jumped 40 percent since the start of 2019.
That means the median home price in the United States is now four hundred and forty thousand dollars up from just three hundred thousand just a few years ago.
And normally, you would expect asking rents to keep up with those home prices. The home is an investment so if the value goes up then how much the investor makes on a rent should go up as well.
But now, that hasn’t happened. While asking rents are heading higher, they haven’t kept up with those home prices. You see because of the eviction moratorium during the pandemic, many landlords didn’t raise their rents.
Why increase the rent if you can’t evict somebody for not paying? Landlords just wanted to get something instead of nothing in the fourth quarter of 2020.
The average mortgage rent and the asking rent is about the same at twelve hundred dollars a month. Since then, rents are up just ten percent nationally to thirteen hundred and fourteen dollars in June according to the Census Bureau, while mortgage payments are up 58 to 1893 dollars.
That has made the mortgage to rent trade-off Spike to 1.5 times. Buying a home is now one and a half times more expensive than renting. Something that hasn’t happened in decades even during the housing bubble.
Now home price growth has slowed since June and home sales have been falling for months. Home buyers are actually backing out of contracts and that could be the sign of the next crash in real estate.
And I know you’re saying all these numbers work out in a general sense whether it’s better to buy or rent a home for most. But how do you tell when you should be buying versus renting?
Here I want to give you two ways to know exactly when you should buy and when you should keep renting.
Buy Utility Rent Luxury
The first is what I call the buy utility rent luxury rule. It is a great common sense idea that says if it’s something you absolutely need, then you own it. It’s a utility purchase and the minimum you need to get by.
Luxury, though, that’s something beyond what you need. It’s that exercise room that you’re never going to use or the swimming pool that’s going to cost a grand in maintenance every year.
If the home you’re going to be buying includes a lot of these luxuries that you don’t need, you should rent instead.
For example, here in Tampa if we were to buy a four bedroom house around 1600 square feet, no pools, fancy bells, or whistles, pretty much the minimum we need for three bedrooms and my office.
We could get something like that for just under three hundred thousand dollars or a hundred and seventy dollars per square foot.
But before moving, we knew we wanted to live in a community with lots of amenities. We ended up in Corey Lake Isle and well for a kid born on the wrong side of the tracks, this place is amazing.
We’ve got a community pool with a slide four, Parks, a lake with a beach and Lakefront right outside the house. Oh, it’s fun and there’s always something to do but it’s definitely a luxury.
The average price of homes in the area right now is six hundred and ninety three thousand dollars way over that base utility house that we would buy.
In fact, even being on a 20% down payment a 30-year mortgage would cost us forty seven hundred and fifty dollars a month way more than this cheap man is willing to pay.
So instead of buying the luxury, we’re going to rent because of that Buy utility rent luxury rule that for twenty four hundred dollars a month, we get all the benefits of the community and save thousands of dollars.
Be Honest With Yourself
And the second way to know whether buying versus renting is best for you is going to take some brutal honesty on your part. So remember when I said buying is the smarter choice even if the numbers don’t quite make sense.
Most renters will end up spending that extra money each month instead of saving and investing it. Well, are you most people? But most of us are.
Think back to those times when you have that extra money in your budget, how much of it did you save and how much went to buying that treadmill that is now a twelve hundred dollar coat rack?
Are you someone that saves money regularly and then doesn’t blow it every year? Do you have an investment account that you deposit into each and every month? If not, you might just be better on that forced Savings Plan called a home.