Should you rent your house or should you purchase your house? Everyone seems to have some opinion on this topic, but which may be the best investor-friendly choice? There are several factors to consider. First off, here are some calculators you might want to consider using just to determine your break-even points for renting vs buying:
In my area, buying a house would be more worthwhile than renting if I live there for 5 or more years. At 30 years, my house will be paid off and I will not have to pay a mortgage at all, just HOA, taxes, utilities, etc (which would be otherwise bundled into your rent). What if we consider the ramifications from an investing perspective?
DOWN PAYMENTS ARE MURDER TO YOUR ROI
Yes, a down payment does prevent you from paying as much interest on your house, and does save you some money. Most folks buy 20% of their house right off the bat just to qualify for financing. However, there is a catch. Such a big catch that some investors consider buying a house the biggest mistake in their life (yes, I’ve heard these exact words from some folks). What if we invested the money you were going to put as a down payment on a house? An example may better help explain their position:
House Cost: $500,000
Down Payment: $100,000
Equation for Compound Interest: A=P(1+r/n)^nt
(A is future investment with interest, P is the original starting amount of money, r is the ROI as a decimal percent, n is number of compounds per year (1 for annual), and t is how many years the principle compounds for).
You can create your own excel table or use a compound interest calculator if your house cost is different. Below is a chart detailing the result you would get after 10 years. If it sounds amazing to have your $100K turn into over $900K in just 10 years, consider that if you can consistently get 25% returns for 30 years, you’d have almost $25 Million! Now there are tons of assumptions with this including being able to get consistent, high returns without any neutral or negative years, but many investors feel that whatever this final amount ends up being, it will be greater than the value of owning a home outright (even with appreciation and tax deduction for home ownership).
TAXES & IF A HOME IS AN ASSET
Unlike what most folks will tell you, your home is NOT an asset (it does NOT put money in your pocket as Robert Kiyosaki would say). That being said, owning your home could allow you qualify for many tax deductions you wouldn’t otherwise get like mortgage interest and property taxes. Keep in mind that if you don’t have enough deductions to exceed the standard deduction (which was $25,100 for married couples in 2021 and $12,550 for single filers), then just taking the standard deduction makes more sense and wouldn’t qualify you for the special “I bought a house, so I get a special rewards” that come with ownership. Recall that you cannot sell a house for a tax-free gain unless you’ve lived in it for 2 of the past 5 years. Some folks use this strategy to buy multiple houses and do “live-in flips” while using extremely affordable owner-occupied loans. If you sell a home in less than 2 years, then you will only get a proportional amount of tax reduction. I know this from experience!
HOW MUCH OF A HOUSE CAN I AFFORD?
This is absolutely the wrong question to ask and is a FIRE-killer. Many banks are happy to tell you how much you qualify for, but not tell you how much house you SHOULD buy. Banks are incentivized to loan you as much debt as you can pay.
The Final Conclusion
It is far too difficult to give a catch-all answer to if one should own or rent because it is highly dependent on the the following factors: location, home cost, down payment amount, emotional value of ownership, neighborhood & schools for children, family support, need for stability of future residence, expected number of years lived in residence, taxes, insurance, etc.
Generally speaking, the shorter you plan to live in the house / area, and the higher the total cost of the house vs rent is, the more sense it makes to rent and invest the down payment you would have used. The longer you plan to live in a house, and the cheaper the purchase price vs rent, (AND IF YOU HAVE A VA LOAN or other advantageous loan situation), buying is more likely to win.