I get this question a lot.
Should I purchase a home with a mortgage, or should I rent?
If I buy a place, I’ll need shitloads of money and a down payment and all that stuff. What if I want to move later and can’t sell?
But if I rent, then aren’t I wasting bazillions of dollars on rent when I could be building equity in a house?
What do I do???
Many people have lots of different opinions on this, and I don’t think there is a definitive answer. Rather, owning vs. renting is purely subjective based on these factors:
- Your age
- Your lifestyle
- Your family situation (single, married, with kids, without kids, taking care of an elderly parent, etc.)
- Your preferences
- Your mid-term and long-term future plans
Those are the factors that need to be weighed. I can’t tell you whether or not you should own or rent, and neither can anyone else, because we don’t know those five factors.
That being said, here are some general guidelines based on those factors:
If your current real estate market is really hot, and has been really hot for many years, RENT. If the market has been hot for many years, you’re probably at the peak of the market, which means it’s a terrible time to buy right now. You’d be buying high right before the downturn. Not smart.
If you’re older, settled, and live in a city you’re quite sure you’ll stay in for 10+ years, BUY. There’s absolutely no reason to rent if that’s the case. Go ahead and buy and enjoy your home.
If you’re planning on moving within the next 24 months, or the odds of you moving in the next 24 months are high, RENT. People who own their own homes sacrifice mobility. If you want to move soon, or even if you want the option of moving soon, do not buy. Rent.
If you’re planning on moving soon but the real estate market is getting hotter after a bad downturn, BUY. This means you can probably sell or rent out the home at a profit. I made a lot of money in the 90s by buying homes in a newly hot market, living in them for a while, then moving out and either selling them or renting them. This is a little risky though, so be aware of that!
If you’re doing five flags, RENT. Under five flags, you are not allowed to own any assets in the country in which you live (or spend the most time). This means you must rent even if you don’t want to. The best way to handle this financially is to get some rental properties in a booming country, pay them off, then use that rental income to pay your rent in your home country. It’s pretty much the same as having a paid-off house.
If you are super picky about every little detail of how your home is laid out, BUY. The advantage of buying is that you can do whatever you want with the house no matter how crazy. Renters can’t really do this (though there are exceptions).
If your priority is getting the most house for your money, RENT. In most real estate markets, you will get much more for your money by renting than buy buying. Let the owner of the house take the risk and the loss while you live in a nice big house for a large discount.
If you’re reasonably young and don’t really have a plan for what you’re doing with your life yet, RENT. Again, renters are more mobile. If you have no idea what you’re doing, renting is a much safer bet for you. I’ve seen young people buy houses only to lose their asses a year or two later because they needed to move and didn’t plan things well.
What I’ve Done
If you want a real-life example of the above principles, here’s what I did.
When I was 18, I rented an apartment, because that was all I could afford. (And I could barely afford that!)
When I was 19, I purchased a condo. I knew I’d keep it for the long-term, and rent it out if necessary. I lived in it for about two years, rented it for about three years, and sold it at a huge profit.
After that, I bought a small house. I did this because I knew I was getting married and having kids soon (because I was stupid; I was way too young for that), so I figured I was not moving anytime soon.
Over the next ten years, when I was a family man, I moved and sold my house whenever the home values shot upwards and stayed put whenever they were stagnant. I did very well with this.
When I was in my early 30s, I was stupid again and purchased a house that was much more than I could afford. It stressed me out constantly. I gave it to the ex-wife during the divorce, who foreclosed on it.
After the divorce, I rented for a few years because I didn’t want any assets like that during the divorce (it could have been taken away from me or reflected badly upon me during the legal proceedings).
After the legal divorce was over, I saw that the real estate market was pretty stagnant and I wanted mobility, so I chose to rent for about five or six years.
After that, when I saw the market get hotter, I purchased a house. I lived there for just over two years and sold it last year at a nice profit and paid zero taxes on the gains (because I lived in the house for more than two years).
Just two months ago, I put a two-year lease on a rented house (that I talked about here) for me and Pink Firefly to live in before we make our final exit from the USA in January of 2021, where I will rent our next house under my five flags plan.
The key point here is that every time I made the decision to rent or buy, it was because of a thoughtful, well-analyzed plan. I never rented or bought based on a whim (besides that one time in my early 30s), nor what people told me to do.
That’s how you need to play this.
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The Lord Humungus
Posted at 05:11 am, 23rd January 2019Everybody tends to want to be told that renting is either good or bad. To paraphrase Jacob Fiksar from “Early Retirement Extreme” – People tend to under-utilize renting when it would benefit them, and over-utilize it when it doesn’t.
Investor
Posted at 05:43 am, 23rd January 2019There is a very important factor that you did not mention: the (upcoming) (geo)political situation in your city/country.
There are many parts of the West where it looks like there could be (civil) war, extreme hyper oppressive government structures, etc. Buying houses in those places is absolutely insane, yet I see so many people buying like as if they didn’t follow the news for the last 2 years at all…
Another important factor to consider is that most people wrongly think that if you “buy” a house you actually own it. This is not the case in the vast majority of the world. Your land/house is on a permanent loan from the government and if you don’t pay you lose the house regardless of how much you “bought” it for. This does not have an affect on the financial aspect (as long as these things are taken into account) but it does have an effect on the argument “I want to have my own place”/”I want to have a place that is MINE”.
CrabRangoon
Posted at 08:44 am, 23rd January 2019This is a great analysis of rent vs buy. Too many articles out there seem to always tilt one way or the other but the weighted factor approach is best. There are pros and cons depending on those factors. The one nice thing about renting is you aren’t on the hook for anything. The landlord has all the risk as you stated and I’m free to move any time.
I made the mistake as a youngling (25) to buy in 2006 almost at the peak…we all know what happened next. I believed the boomers who said “real estate ALWAYS goes up kid, you should buy for sure!!!”. To be fair the majority of us didn’t know how deep the housing market fuckening went at the time. If I had just rented a bit, i could have scooped up a steal after the crash-lesson learned.
I’m in Chicago and renting after finally selling that property last year (turned it into a rental property a few years back). The market is definitely already hot so I’m sitting on the sidelines till things come down again. The prices are ridiculous right now.
Good stuff Caleb!
Dan
Posted at 10:43 am, 23rd January 2019Is this true for most countries? Here in the UK, this is not the case.
I actually didn`t realise this was the case in some countries.
I rent an apartment but if I had bought it, the mortgage payments would probably cost me about the same or a little less than the rent. House prices are high here in the UK though, so that`s why I put up with it.
Caleb Jones
Posted at 11:53 am, 23rd January 2019Exactly.
Good point, but I purposely wanted to avoid those politicalish topics for this article. But yes, you’re right.
Yeah the London area is going insane right now. It’s the exception to the rule though.
Steven
Posted at 03:41 pm, 23rd January 2019One thing you didn’t mention is what can happen when your lease is up, and you’re renting a house. In a hot market (which seems to be almost everywhere now) your landlord is most likely going to want to cash out. Not just to make a profit, but to avoid any potential crash coming after the boom.
When this happens you will be put out on your ass. I know this first hand because it happened to me a couple of years ago. One day I got an email from the owner telling me how great a tenant I was, and that I had 3 months to get the fuck out because he’s selling it.
I had multiple showings with strangers wandering around looking at all my shit, using my bathroom and freaking out the cats that I had there. I scrambled to find the condo I moved in to and found that the rental market had also increased significantly.
My point is that how do you have control over rental property unless you ‘re strictly referring to apartments/condos where a corporation owns it and it’s not probably not going to kick you out to sell it?
When this happened to me you mentioned “redundancy”. How can you be redundant with your personal residence unless you mean having more than one?
Warmonger
Posted at 08:13 pm, 23rd January 2019Caleb,
what’s your take on buying a tiny house? They sound like a great option if you’re young and single. You can make a habitable one for $10k or less. And you can put them on wheels, so mobility isn’t an issue. Of course, they conflict with zoning codes in most areas. But it seems like they are quickly growing out of the niche that are right now as more people are discovering that McMansions are a horrible financial idea.
Caleb Jones
Posted at 09:12 pm, 23rd January 2019Unlikely on the overall, but yes, that’s one of the disadvantages of renting; you must never plan on any landlord renewing your lease, because they can kick your ass out at the end of the lease for any reason they like.
You can’t. If you want 100% control, don’t rent. Buy.
You have a habit of not quoting me correctly or completely. I didn’t just say “redundancy”. Here’s exactly what I said to you:
Because you didn’t have a Plan B. Always have a Plan B when you rent. I rented a house for seven years and never had a problem, but I had a very clear Plan B if they jacked up the rent or sold it.
That. As just one example, when I rented, my Plan B was:
1. I had a $1500 emergency move savings account set up and funded.
2. I had a storage unit located near my house where I could move all of my stuff in a heartbeat.
3. I had an arrangement with one of my business friends to sleep in his downstairs for up to 30 days if needed in a pinch.
4. Whenever the lease was nearing renewal, I spent about 30 minutes on rental websites, keeping an eye out for possible places I could quickly call if needed.
If you don’t have a Plan B, yeah, your landlord has you by the balls. I don’t like anyone having me by the balls, so I always have a Plan B (and sometimes a Plan C)… for everything.
I think it’s a fantastic idea and there have been times I’ve been temped to do it myself. The YouTube vids I’ve seen on these things are very impressive. Very smart stuff.
Investor
Posted at 12:53 am, 24th January 2019That is not the in many countries. Where I am the lease renews automatically and the owner / agent needs a very good reason to kick you out – for example selling the house and needs to provide you sufficient notice period and/or replacement accommodation. Its very hard to kick someone out. That is why from where I am standing renting seems way more secure. If it was the other way around I may also be considering buying (if I was not so geographically mobile).
Nothing in life is 100% control. Your house can also be taken away from you without compensation by the government in the state of national emergency / crisis / war for example.
How does it work with storage space for the house? Do you need to buy or rent a land to put it? How much will you pay for that and in what kind of neighbourhood can you have it? That is somethign to consider but in general my approach is if you can buy house with cash do it, I think real estate is something nice to invest in, I just don’t like buying on mortgage especially in current economic / political climate.
Caleb Jones
Posted at 10:21 am, 24th January 2019That’s 2% Rule stuff, and thus irrelevant.
There isn’t much. In my opinion, you shouldn’t need “storage space.”
Eddie
Posted at 03:47 pm, 24th January 2019Renting vs Owning…. great advice for homes…
How about vehicles…
Would you recommend Leasing over Buying?
Pros and Cons for Business.
Pros and Cons for Personal.
Thanks
Eddie
Posted at 04:28 pm, 24th January 2019Additionally, in regards to Five Flags.. I always wanted to ask you why Puerto Rico wasn’t on your list…
Many have moved there because of the tax benefits: Act 20/22.
Caleb Jones
Posted at 06:10 pm, 24th January 2019Too complicated to answer in a quick comment. Really depends on the scenario.
Same reason Canada and Mexico aren’t on my list; too close and too dependent on the USA.
david
Posted at 10:02 am, 25th January 2019I get annoyed hearing idiots say “your home is not an investment.” Everything’s an investment. Unless the average dude plans on beating the odds and never getting divorced, having to move out of state for work, or losing his job, or getting terribly ill, chances are that during the course of a 30 year loan, he’ll need to sell that house early, or at least consider it. In that case, he’ll be wishing he purchased his house when the market was down.
Realtors when the market is down: Now’s the best time to buy because prices are going to go up!
Realtors when the market is up: Now’s the best time to buy because prices are going to keep going up!
dc88
Posted at 03:25 pm, 25th January 2019I think everyone’s investment portfolio should include real estate. Whether you live in the property or rent it out depends on your personal situation and the market you buy into.
For example, principal residence is tax free in Canada and the USA. Rental properties incur capital gains taxes (hopefully the value goes up) in Canada. I think in the USA, if you roll the proceeds into a similar or move expensive property, then you can defer the cap gains using the 1031 exchange. This is HUGE for Americans, since you can compound your wealth tax free. In Canada, its 2 steps forward, 1 step back.
Being in Canada, living in my primary residence was significantly beneficial compared to renting it out and then me myself renting too. The $75k put into the property has resulting in $300k in tax free “profits” (I have not sold to realize these gains) over 5 years. If I were to put that $75k into the stock market, it might have resulted in a portfolio worth $150k to $200k. Then I pay taxes on the $75k-$125k in profits. In the mean time, I would have flushed $1,500 a month down the toilet had I rented. Instead, the $1,500 a month in mortgage and home expenses, about $500 a month went towards principal repayment, which I will capture when I sell.
I purchased during a period when there was very low interest rates and loose monetary policy, so I speculated that eventually the increase in money supply will have to double the prices of assets (like stocks and real estate). Because I can leverage my purchasing power with Real Estate via debt (which was super cheap at the time…and still is), my upside is magnified. Worse case scenario, I can rent the property out and have a tenant pay rent, which would cover my costs. I needed a place to live anyways, and didn’t foresee moving in 5 years. Even if I did move, I planned not needed the cash and could rent the property out.
I also purchased several other properties for rental purposes. If you buy the right property, in a good area, catered to a good class of people, I find real estate to be a very no brainer passive way to make money. I manage my own and parent’s properties and we have the best experiences with middle class white collar employed professionals. These are 1 or 2 bedrooms, newer units, that are close to or in the downtown core. In my city, being downtown is a fusion of offices and high rise condos. In the USA, I think many cities are empty downtown after working hours and the vagrants come out….so adjust accordingly.
Since I have a product targeted to a specific class and am careful of who I tenant the property to, I literally have no issues. Rents are paid on time, homes are kept in good condition, people don’t dick me around, and no real issues. Things tend to run themselves. Once someone moves out, then a day or two doing a deep clean and possibly a refreshed coat of paint (happens every 4-7 years).
I find real estate a very easy way to make money in the long term, if dont correctly. Compared to starting a business, real estate requires a lot less skill to be successful. There is no salesmanship involved, you don’t need a technical skill, you aren’t hustling or A/B testing new ideas constantly, you aren’t reliant on a changing consumer, no real competition that can out innovate you. Just make sure to buy in an area with demand (low vacancy), cater to a good white collar professional, and don’t be in an area where its like a single industry that the people are reliant on.
joelsuf
Posted at 05:24 pm, 25th January 2019BUY. With CASH. Taking out a car loan is one of the stupidest things anyone can do.
Anyone, even fucking unemployed homeless people can save up a couple grand and in a year or so buy a late 90s-early 2000s model car from a junkyard.
You don’t need to impress people with that $200000 2020 Bugatti that you drive off the lot for $0 but then have to make $5000+ payments on it for the next decade lol.
And taking out a car loan for an “efficient” car…don’t make me laugh. That’s almost as bad as borrowing money to go to college.
Buy a car with cash. Every single time. Tighten up and save up for it if necessary.
I bought my car (which was relatively new) with cash for $11000 way back in 2007, some of it I saved up for, some of it I used some of my late dad’s money for. Still runs perfect, no issues with it at all. It pretty much paid itself back within three years. Dad would have been proud.
Meanwhile one of my closest friends foolishly took out a loan for a brand new car in 2015…now he’s struggling to pay for it and may need to sell it just to avoid the payments four years on.
The car? A 2016 Mazda 3. Could have bought a 2007 or 2008 model just by saving up 4 or so months of his pay (he was making about $30000 a year at the time).
Franklin
Posted at 06:44 pm, 28th January 2019Always have a Plan B! Don’t get residential oneitis!
Crappy jokes aside, the general principle here is tremendously important to living a happy and successful life. I’m sure it’s no coincidence that it’s a recurring theme here and at Caleb’s other blog.