The Rent vs. Buy Decision
The rent vs. buy decision is as old as the concept of financial planning itself. There are people who have very strong views on both sides of the spectrum. There are some people who believe that owning a home is always better and that renting a house is like throwing money away. At the same time, there are others that believe that renting is the way to go because of the less commitment and mobility that it provides.
Needless to say that this decision has a huge impact on the financial future of any individual. Firstly, housing expense is the single largest expense that any individual has. Even by the most conservative estimates, people spend around 25% to 33% of their income on their housing decision. Hence, it is important to be frugal about this decision as it sets the tone for the entire budget.
In this article, we will have a closer look at some of the financial and non-financial arguments which are made in the rent vs. buy debate.
Financial Aspects of the Rent vs. Buy Debate
Renting and buying are both different ways to stay in possession of a home. However, the expenses and benefits that arise from these different structures are quite different from one another.
Lets take a look at the true cost of renting and buying.
Case #1: Renting a House
When a person rents a house, they only have to make a couple of small financial payments.
It is important for a person to consider all the costs and come up with a consolidated total cost of renting. Comparing only the rental cost with the ownership cost is incorrect. This number is expressed in relation to the value of the house in the form of a rental yield. This helps compare the rental costs amongst different properties and also to compare it to different investment options.
Case #2: Owning a Home
When it comes to owning a home, there are more payments that need to be made.
All this should be added up to reach at the total cost of ownership. In most parts of the world, ownership will be at a premium. However, the amounts need to be compared. For instance, if the cost of renting a property is about half of what it costs to own the property, one might be better off renting the property. On the other hand, if the property prices are appreciating rapidly in the vicinity, then buying may be a better option.
The bottom line is that there is no single answer to the rent vs. buy question. Hence, the method to make a comparison between the two options has been explained above. The decision can be made by the individual based on the outcome of their analysis.
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