Rent vs. Buy
Everyone needs a place to live, so the choice is between renting and buying.
You might hear some people tell you unequivocally: “Buying is better” or “Renting is better”, but the truth is pretty nuanced.
Because of (roughly) efficient markets, buying and renting are in a natural equilibrium.
If buying became spectacularly better than renting, there would be a rush of investors to bid up the purchase prices and press down rents.
If renting became spectacularly better than buying, there would be a rush of tenants to bid up rents, which would attract investors.
Therefore in each market, they are roughly in equilibrium in aggregate. That doesn’t mean that they are equal for each individual though.
Which option is best mostly depends on your lifestyle.
Renting advantages
Mobility - Renting lets you move to take advantage of a career opportunity right away if you are month-to-month. Someone who bought might be tempted to stay put in a less than ideal position. This is a little-appreciated hidden cost to buying.
Flexibility - Need a bigger place? Moving in with someone? No problem, just 30 days notice and you’re done. Compare that with the hassle and cost of selling a home.
No maintenance - Your landlord is responsible for major maintenance, including major appliances. Roof leak? Not your responsibility. Your monthly expenses are very predictable in the short term.
No upfront cost - No down payment required. You can invest the money saved.
Less risk - Many Buyers in 2007 lost their down payment and more. Remember that real estate is often leveraged. Buyers put 20% down, but if the housing prices drop 20%, buyers lose 100% of their down payment. Note: I said “Less risk” and not “No risk”. Renters run the risk of getting priced out of their city by rising rents - but it’s a much more incremental risk than buying.
You may want to rent if you are young, single, and starting out in your career, where you want to be able to flexibly take advantage of new opportunities or living situations. You might not have tools, time, or interest to do handy things around the house yourself, since you are busy dating or working or being hip.
Buying advantages
Security - There’s no landlord that can end the lease for some reason.
Renovation - Homeowners can renovate or remodel their home without permission - and put in their own sweat equity.
Quality - Owned homes are generally in better condition than rentals. This is related to Renovation. Landlords only need to make their properties appealing when they are vacant.
Pets - Many rentals do not allow dogs or large fish tanks.
Predictable payments - There’s no one to raise your rent. Your mortgage payment can be locked in for 30 years. Caveats: Your property tax will go up slowly, and maintenance bills can be large and unexpected.
Tax advantages - You might save on your taxes if you buy and itemize your taxes, but this only really applies to high income households with high mortgage balances.
Since the Tax Cut and Jobs Act of 2017, I don’t think this applies much anymore. The standard deduction has been raised, the property tax deduction capped at $10,000 a year, and the deductible mortgage balance limit lowered. Many households will now simply take the standard deduction and not receive a tax benefit from their house.
You may want to buy if you are settled in a stable career and home life. You may have kids with friends that want to keep going to the same school. You’re domestic now, so doing home improvement projects sounds like a great weekend to you.
Life Situations
Here’s some life situations that I think make the decision easy.
These are just my suggestions of thumb. There are exceptions to each category, and you may fit multiple conflicting categories.
I noticed after writing this list that there’s more Rent lifestyles. I think that reflects the fact that Renting is a good default option for people in transition - and we spend a lot of our lives in transitions.
Rent Situations
Generally I’d advise anyone with a high likelihood of a life-transition in their near future to Rent.
Single, and looking
Rent. You’ve got a life transition ahead of you if you end up cohabitating with a future partner. You might even move cities to be with this person.
Dating, on the path to marriage
Rent. There’s a very solid legal framework for married couples owning together. It’s a lot more complicated otherwise. What if you break up? Or worse - stay together in an unfulfilling relationship because of the house?
Student, or Medical Resident
Rent. There’s a guaranteed life transition ahead of you, and a decent chance of a location move. You might have limited time and don’t want to spend it maintaining a house. I think this rule is weakened if you’re going to school in a major city / center of industry though.
Not Handy
Rent. If you aren’t handy, you don’t want to learn, and you don’t have handy family, you’re going to be spending a lot of time and money hiring contractors. Someone handy might be able to patch a hole in the wall in 20 minutes on Saturday. You might have to take a day off work and spend $100 for a handyman.
Buy Situations
Generally I’d advise anyone with a more static life situation, where they are likely to live in the same place for a long time, to Buy.
Children or Pets
Buy. Landlords don’t like to rent to families with young children or large pets. Discrimination based on family status is illegal, but real. Your rental options are going to be more limited and will cost more.
Lots of savings, don’t trust stocks
Buy. If you have a lot of savings but don’t like the stock market, buy a house. It’s an asset you can lay your hands on with some positive rate of return. Better than stuffing your cash in a mattress (or low yield CD) anyways.
Handy
Buy. The more home maintenance or improvement you can do yourself, the better Buy is going to be. In the extreme case, if you are a contractor, and you already have a pickup truck full of tools, I think it would be difficult to lose by choosing Buy.
Nearby Family
Buy. If you have a lot of nearby family, that’s a signal you will likely stay in the area for a while. That makes it more likely buying is good.
Is Buying a Home a Good Investment?
TLDR: Buy a home for the shelter it provides. Don’t expect it to make you rich.
If you live in it, it’s closer to consumption
If you live in your home, it’s too optimistic to consider your home an investment. Most investments generate income, but your own home generates expenses.
It does provide shelter, of course, and allows you to avoid paying rent. But your car also provides transportation, and hopefully most people don’t consider their car to be an “investment”.
Also like a car, the physical structure of your home in constantly depreciating. It requires ongoing maintainece, and goes out of date as amenity standards rise and building codes get revised.
Even if you do consider it an investment, it has many of the worst qualities of an investment. It’s illiquid - expensive to buy and sell. It’s undiversified, since most people only own up to one home. And it has negative cash flow - requiring ongoing maintainance and taxes.
Buying a larger home because “it’s an investment” is not a great strategy - unless you’re a corrupt government official trying to hide assets abroad. Buy the size home you actually need for your household.
All that being said, many people have seen their homes appreciate, so I want to address that.
Home appreciation is real, but it’s complicated
How much does real estate appreciate? One of my favorite studies is Herengracht index, which tracked one particular home from 1628 to 1973. It found that adjusted for inflation: “Real home prices did roughly double, but took nearly 350 years to do so.”
See the NYT Article and this blog post with charts.
The most interesting part of the linked charts is that the data is over such a long period of time, that the “bear” and “bull” markets last centuries, far beyond any human timespan. For any indivdiual buyer on that chart, they may well reasonably conclude: “housing always goes up” or “housing always goes down”. And they could both be right - depending on which century they’re in.
Now it’s undeniable, of course, that many urban homeowners in the United States have seen awesome appreciation in the value of their home in the last 30 years. But for every San Francisco, there is also a Detroit.
I don’t think you can predict in advance which of the two you are in. Someone living in 1950s Detroit could have well concluded that their city was the center of American industry and innovation, and had no reason to believe that would change as quickly as it actually did.
The bottom line is - your home will probably keep pace with inflation. Don’t necessarily count on exceeding that benchmark. At least it will beat cash.
Owning a home hedges against inflation
I just said it will keep pace with inflation, which may not sound exciting, but I think that quality is actually pretty important.
It means that you may actually sleep the best owning exactly one home.
Own zero homes - If you rent and own zero homes, you’re in many ways “short” the real estate market. If rents and prices go up, you will be sad, since you will have no choice but to pay whatever the going-rent is.
Own one home - If you own your own home, you’re in many ways indifferent to the real estate market. If it goes up or down - it doesn’t matter too much. You can’t gain or lose money unless you sell, and then you’re likely to just have to roll your windfall into your next home – or use your reduced bankroll to buy a reduced-price replacement home.
Own two or more homes / rental properties - Then you pretty unambigously want the market to appreciate and may lose a lot if it falls.
Your own home is not just an inflation hedge, but a virtually perfect inflation hedge for housing in your local area – and that may be exactly the hedge you need.
Can you time the market?
I don’t think I can. If you can, you should probably stop reading this and become a full time Wall Street trader.
So really, is it a good investment?
Your residence is closer to a unit of consumption than an investment. Buy the size home you need, but don’t buy a larger one because “it’s an investment”.
Real estate does seem to appreciate, but at a rate barely beating inflation. Moreover, this is highly dependant on the city and country. Don’t count on it.
Your home however, is a great inflation hedge against rising home prices. That might help you sleep at night.
Buy a home because you need a place to live, not to make money.