Rent or Buy?

June 16th, 2009, by

Q: I’ve heard people on both sides of this debate: Is it more economical to buy a home or to continue to be a life-long renter?

Mariko Joplin, Fremont, CA

A: Whether you buy a home depends first and foremost on whether you can afford it. I’m a huge believer in homeownership. I purchased my first home a year after graduating college. But having said that, please know you are not a financial failure if you rent. Becoming a homeowner is just one way to improve your net worth; however, it’s not the only way.

As many people have discovered with the recent recession, home prices can and do decline. The S&P/Case-Shiller national index found that, in the first quarter of 2009, home prices fell 19.1%, the largest drop in the 21-year history of collecting such data. In looking at 20 large metropolitan areas, the index found home prices dropped a record 18.7% compared with a year ago.

So what’s this got to do with you?

It means you shouldn’t just look at buying a home as an investment, but a place to live. People often say that if you are renting you get nothing for your money. But that’s not true.

Look up. What do you see?

You see a roof over your head. That’s what you are getting for your money. And renting allows you to pick, and leave with less cost, something that is key in the current job market.

Buying a home costs money, not just in the mortgage and real estate cost, but also in the upkeep. Talk to any homeowner, and you’ll quickly learn it’s costly to keep your house in good shape.

If you rent, you don’t have to worry about such upkeep. That’s the landlord’s problem. If your toilet breaks, you get to call the landlord, who has to pay to fix it.

However, with renting, you often face rental increases.

So you see, there are costs to both sides of this equation.

To resolve this issue, you may try using a rent vs. own calculator at Bankrate.com.

Buying a home today is tougher, because lenders are going back to a time when they required a large down payment, 20% in many cases. You will also have to show you’ve got some money in the bank. If you can jump over or through the hoops, you may be ready and able to afford a home.

However, here’s my rule of thumb for buying a home. You should not be spending more than 36% of your net take-home pay on your housing cost, whether you are renting or buying.

Why 36%? Anymore and you won’t have much room to save, invest and pay for unexpected expenses.

Ultimately, for many people, their home is their largest asset (after accounting for what they owe on the place). Homeownership is definitely something to strive for, but only when the time is right for your budget.

Last modified: April 26, 2011 at 10:59 am