Sunday, October 30, 2016

What they don't tell you about buying vs renting

Every once in awhile I run across some article about the "rent vs buy" argument.  Inevitably, you'll come across some calculator that you crunch numbers into and it'll spit out an answer on what is more favorable to you financially.  Recently I saw Adam Conover had a piece about the "is buying a house a good investment?"

While I don't disagree on any of the things mentioned in the articles or the above video, I'd like to mention some of the subtleties, benefits, and downsides they don't tell you in the "rent vs buy" argument.

I originally had this listed as "Pros" and "Cons" in this article, but I eventually realized that it's somewhat relative if they are a Pro or Con.  So I'm just going to list them all down here in a somewhat random order.

1) If you don't buy a house, you have to save/invest money like the calculators say you should

This is the absolute most important subtlety that none of the articles or calculators tell you.  If the calculators say it is a better financial decision to not buy a house, you have to remember that you have to actually follow through and do what it says.  You have to actually save/invest all the money that you aren't using on a mortgage or home maintenance.

How confident are you in your ability to do that?  Every vacation, nice night out for dinner, etc. eats into this calculation.

2) If you buy a house, you have less disposable income

While you may be "ahead" financially by buying a house, your day to day disposable income will probably be lower.  After all, a nice chunk of your money is now tied up in a home's equity.

I sometimes wish I had traveled more when I was younger, but without that disposable income it was hard to do.  I don't necessarily regret the decision, but it's something that may bother some people more than others.

In contrast to #1, #2 can somewhat be viewed as a way to have a "forced savings account".   Some percentage of your mortgage goes towards equity, so it is forcing you to save that money.  If you're not good at managing your finances, forcing you to not be able to spend money may be the best way to save money.

3) If you buy a house, you become more responsible and learn a lot things

I bought my first primary residence when I was relatively young, I believe 24-25.  It was much earlier than many others I know that bought a house.

The responsibility of taking care of the place, dealing with a mortgage, managing your finances, etc. makes you mature as an adult much faster.  Whether you view this as a pro or con is up to you.  I remember suddenly viewing most financial transactions in "mortgage payment" units.  Others I've spoken to said the same.  Vacations, nicer cars, etc. were all calculated within these units.

In addition, maintenance of the property makes you learn a lot of things you otherwise probably won't have.  I can't speak for every home owner, but when you realize it'll cost you a thousand dollars to hire someone to fix X in your house, you eventually figure out how to do it yourself.  Everyone will have their comfort level thresholds on what to do themselves vs hire someone (I draw the line at most plumbing tasks), but you will figure a lot of things out.

4) If you buy a house, your time will be eaten up by chores

Following up #3, all those things you learn about and do on your own will eat up your time.  But if you have less disposable income, perhaps it doesn't matter :-)

5) If you buy a house, you can rent it out

For some reason, many of the articles talking about loss of flexibility don't bring up the fact that you can rent out your place if you really need to move.

Obviously one needs to judge the rental market in your area, how much you can rent out your property compared to your mortgage costs, your time to manage the property, etc.  But it is an option that can be looked into.  If you buy a beginner property (e.g. condo) the numbers certainly play out much better than a single family detached home.

6) If you buy a house, costs are stable OR If you don't buy a house, costs can be unstable

Anyone who has lived in the San Francisco Bay Area for the last 5 years can tell you about the horror of seeing their rent increase over 10% per year for the last 5 years.  If you buy a house, while costs can be higher initially, you atleast know what the costs will be and it shouldn't change much.  So one might consider this a cost of purchasing stability.  You are trading some higher costs for known stability, which can be a benefit in a way.  While my property value wasn't great during the financial recession in the early 2010s, the fact I was still paying less than the rental market made me feel really good that I had bought a place.

7) If you buy a house, consider your finances after 30 years

One thing that doesn't seem to be discussed in the articles and the calculators is that they don't consider your finances after you pay off your mortgage.  At some point, you will pay off the home and no longer have a mortgage.  I think most of the calculators only think about your net worth after 30 years of mortgage payments.

Obviously, one must consider how long you realistically think you'll be in a property, but you should atleast think about it.