- Determining whether it is better to rent or buy a house largely starts with the question of whether you want to build wealth for your next generations.
- Buying a house has many benefits, but many expenses too and there is always a risk of a housing market crash.
- The timing of buying a house and your finances will help you make the choice of buying a house (or not) much easier.
There is a myth in the housing market that home prices tend to keep moving higher over the long term. Having a financial asset that appreciates supports the idea to buy a house. But if we look look back to 2008, we’ll see that the subprime mortgage crisis resulted in a large decline in U.S. home prices, a housing bubble, tons of mortgage delinquencies and a global financial crisis. As such, the question “is it better to rent or buy a house?” is not an easy one to answer.
For example, one of the main points to consider when answering this question is whether you want to build wealth for your kids. (If so, then buying a house makes sense). Life is about putting priorities first and making sound decisions. You can decide to buy a home if you desire to leave this asset to your kids. This is a very strong motivation to go ahead and invest in a home rather than paying rent.
There have been studies that show that home prices generally tend to appreciate. Don’t take this as a guaranteed rule, however. From an investment perspective, if you can afford to buy several homes at low prices and then rent them, you could end up making passive income. Is it easy to do this? No, but it’s certainly possible.
With all of that in mind, let’s take a closer look at whether it’s better to rent or buy a house in 2022.
Pros and Cons of Buying a Home
Buying a house has many benefits. After all, you have a financial asset building equity over time. This can allow you to get a home equity loan or a home equity line of credit. There are also tax benefits, where the mortgage interest rate helps you get a tax deduction.
Another major benefit is that you have the freedom to do whatever you want with your home. Do you want to paint the walls in a color nobody else has in your neighborhood? You can do it. You are free to make updates and set your own standards, as long as you do not do something illegal.
The cons of buying a house are related to maintenance and operating costs. As the home gets older, these expenses tend to rise. Likewise, it can be costly to update a home and there is not much flexibility to sell it if trends in demographics or state laws change. For example, a sudden decision by a state to increase their local taxes or reduce them to attract workers and boost their economic growth. Such decisions lead to unexpected supply and demand, which can create an imbalance in home inventory. (Such instances make buying a house or selling it difficult).
What about the general conditions of the economy? In a recession, it seems illogical to buy a house. However, it could be the best time as the prices will be depressed. In a booming economy, home prices logically will rise and homebuyers will end up paying much more than what they might have originally expected.
Is Renting a House Preferable?
There are many advantages to renting a home. You have more flexibility to try several locations and travel often. You can move in and out rather quickly assuming you have arranged the moveout date with the landlord. You avoid the maintenance costs and can even lower your total costs by renting a fully furnished home. You are also stress-free about the home price fluctuations.
On the other hand, renting a house has a few restrictions. You cannot make changes unless you get the permission of the landlord, you may have to pay a rent increase over time, and one day you may get a notice that you must move if the landlord decides to sell the home or give it to their relatives to stay. You may also have to obey some rules. For example, a landlord might not allow pets.
Important Financial Considerations When Buying a House
If you do not have a good credit score, have a low salary or have not saved much to invest in buying a home, then chances are renting a house makes more sense. Another housing bubble may occur sometime, and this will significantly reduce the value of your house. It is generally not wise to buy a house when prices are inflated like they are today.
Your lifestyle, career and personal life will also help guide you to buy a house or not. If you have a career that demands frequent traveling, even abroad, then buying a house may be less ideal. You will have plenty of time to think about buying a house when you finally settle down. If you want to invest capital, let’s say $100,000, rather than use it as a down payment for a new home, it makes sense to assume that you will be getting an attractive annual return that will be enough to finance your rent.
Mortgages are rising, so the cost of buying a house will increase over time. If you want to put logic away and focus on the emotion and pride of being a homeowner, then buying a house might make sense. It is one of the rare moments that you can make an exception in investing and decide with emotions. Just be 100% certain that your choice is the ideal one.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
