The decision between buying a house or renting an apartment is one of individuals’ most critical choices, often leading to common financial pitfalls, especially among middle-class Americans. This blog aims to raise awareness and provide a stark realization of the potential financial risks associated with this decision. Join us in exploring the nuances and making informed choices for a secure financial future.
Deciding between purchasing a house or renting accommodations holds significant consequences. Thorough research is imperative to unravel the optimal choice tailored to your needs. Let’s explore to determine which option aligns best with your requirements.
Is it Always Better to Buy a Home? When is it Better to Rent?
Fundamentally, buying or renting a house will depend on the costs. Within them, we will differentiate the initials when carrying out the purchase or rental operation and the totals considering the long-term horizon.
Initial Costs
The initial costs and the rent are more affordable. There are usually only costs such as liability insurance or the guarantee, compared to the high initial costs involved in the purchase: notary, registry, VAT, appraisal, etc. For this reason, rent is an excellent option to access the first home.
Total Long-term Costs
As for the total long-term costs, they can become factors that make it more convenient for us to decide on rent or purchase. We can add the mortgage installments with your initial expenses and other expenses and compare them with the cost of a lifetime rental. But this is not the fundamental factor.
The Level of Interest Rates
In the situation that has occurred historically in Spain, the purchase was more profitable than rent because although the investment entails more expenses (higher monthly payments, the share of the community of owners, taxes, maintenance), the high annual rates of house price growth made the brick property the best investment. Therefore, the key to deciding whether to rent or buy a home would be to know the performance of existing investment opportunities and the cost of loans, i.e., the interest rates.
Example of Whether it is Better to Rent a Home or Buy it
For instance, if I rent a house for $200 / month for 30 years, I will have paid $72,000.
Depending on the rate of growth of the price of the houses, my estate within 30 years, if you buy the home, will be higher or lower than if you had rented.
It is an extreme case, but it serves to understand that if the interests of the market (investments and loans) are more significant than the rate of growth of housing prices, what we do year after year is to lose money since what we pay in interest for housing and what we stop receiving in investments far exceed the increase in the value of housing.
Even so, there are cases where the rent could be more convenient for other reasons. As we said before, the initial payment is more affordable: bond and insurance against the notary, registration, etc. Also, the rent favors mobility, and we can live closer to work, saving on transportation and gaining in quality of life (in areas where, for example, we cannot buy for the high price).
And the monthly costs are also lower:
- They tend to be lower than the purchase.
- We do not pay the community fee or the annual tax.
- We do not commit so much to our future income, as the rent is usually in the short and medium term.
It is faster to find a rental house than one to buy. And there are also a series of incentives and state subsidies to access a rental.
Conclusion
In short, buying a home is better than renting it when the rate of growth of house prices is higher than the return we can get with other investments and more significant than the interest costs we pay for the mortgage. However, the most common situation is the opposite: the interest on the loans and the returns from other investments did not reach the levels of growth in the price of housing, so buying was a better option from that point of economic view.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.