It’s a debate that divides people almost as much as the whole “bubble vs. soft landing” thing: Is it ever better to rent than to buy? Some people argue that you’re always better off getting into some sort of real estate purchase because that means you’re not just paying someone else’s mortgage. But some other people say that many mortgages (especially the so-called “exotic” ones) basically just amount to renting your property from the bank anyway.
A blog post on investorgeeks.com makes it real simple. Sometimes it is better to rent and to invest the money you’re saving compared to buying a comparable unit.
“For every $100 you spend in rent a month, you’d be better off buying up to $12,500 in property instead,” explains the geek.
“For example, I live in Northern New Jersey, and currently pay $1,000/mn for my 1 bedroom apartment. I would be better of financially if I were to buy a condo that cost up to $125,000. The only problem is that where I live, there’s nothing habitable that I can buy for under $125,000, and if I spend much more than that, it’ll actually cost me more money to buy than rent!!!”
Apologies for the exclamation points, but you get the gist of what he’s saying. Try Buying a one-bedroom condo in San Diego for $125,000. Tijuana maybe, but not north of the border.
“Like rent money, mortgage interest is essentially ‘wasted.’ It goes neither to improving the property nor to building equity. It’s simply a fee for the privilege of living in your house. And in addition to interest, you’re also required to pay property taxes and insurance every month as well,” he continues.
“Buying a home should not be about what you can afford. It should be about wasting as little money as possible. For example, let’s say you can afford to pay $1,200/mn for a condo, but rents in your area are only $800/mn for a nice 1-bedroom. You’d actually be building more assets if you rented, and saved the extra $400/mn in a mutual fund.
So again, how do you determine when you should rent and when you should buy? When the combined home expenses, interest, taxes, and insurance equals your rent, that’s the point when you can and should buy a home.”
Of course, that’s what our good friend Rich Toscano has been arguing all along. Toscano likes to say that the most important statistic out there is the rate of rents compared to the median price (and therefore mortgage payments) associated with buying a home.
But remember, the whole equation breaks down if, like my colleague Scott Lewis for example, you end up spending all that extra cash you’re saving from renting on things like trips to the casinos in Vegas or expensive imported European cars.
So renters, don’t feel too bad for yourselves. As long as you’re saving that extra money, or even investing it, you might not be all that bad off.