The ultimate guide to renting or buying

The decision to buy a house is a major one. It’s fraught with financial and social implications. The good news is I’m here to help. Treat this blog post like a mini-workbook. If you are really trying to decide if renting or buying is right for you, working through these questions will help you make the right decision.

If you’ve read basically any other article of mine you know I believe 25% of your take home pay is the optimal amount to spend on housing per month. Quick side note: I say optimal because depending on where you live this may or may not be totally possible. For example, the median price of homes in San Francisco was \$1 million in 2013! Whereas in Indianapolis the median price of homes in 2012 was only \$102,000. Often the greatest predictor of your ability to afford housing isn’t your income, it’s where you live.

The rent or buy question is a simple one, yet fraught with social implications. What does renting at 35 say about a person? Let me stop you there. You’re overthinking it. Whether you rent or buy shouldn’t have social implications, I’m not saying it doesn’t, I’m saying it shouldn’t. The only implications you should be worrying about are the ones derived from math.

If you are playing the should we rent or buy game, here are the three questions you need to answer in order to determine your path:

Can you afford to buy a house?

This seemingly basic question actually holds a lot. You need to answer these four sub-questions to get the answer to the original question.

1. What is the amount of your current or proposed mortgage payment (principle, interest, taxes, and homeowners insurance)?

2. Annual maintenance for you home will typically cost you about 1% of the total value of your home. What is 1% of the value of your home? What is the monthly cost? (Divide the previous number by 12)

3. Do you (or will you) have homeowners association dues? If so, how much are they/will they be per month?

4. You should typically budget an additional 30% of your mortgage payment for utilities. For instance, if your monthly mortgage payment is \$1,000, then you would budget an additional \$300 for utilities (including phone, gas, electricity, water, waste, TV, and internet). What is 30% of your mortgage payment?

Add all these numbers up. What is the real monthly cost of your house choice?

And don’t forget about a down payment. I recommend putting down 20% on a house, but at the very least you need to put down 10%. Have you saved enough for a down payment?

Can you afford to own a home?

While this sounds similar to the first question, it is very different. Owning a home means maintaining it, caring for it, and repairing it. This becomes a bigger issue if you are looking to buy an older home or a home on a large lot. You need to consider the true cost of keeping up a home, it’s more than a mortgage payment.

While the same can’t be said of renters, there are other factors to consider besides rent. Don’t forget about utilities, distance from work, availability of laundry facilities, lawn care responsibilities, and renters insurance. Just because you don’t have the major expenses associated with homeownership doesn’t mean you can tap out your budget on rent alone.

How long are you going to stay in one location?

It’s hard to plan for the future with the uncertainty of life, which is why renting is growing in popularity. Leases are typically only a year, and are often negotiable on a month-to-month basis. This is not the case with a home purchase. The only two ways to gain equity in your home is to pay down the principal or to increase your home’s resale value. So if you only stay in a home for a few years, neither of these things are going to happen. Buying a home means committing to living there for at least 5 years. Are you ready to make the commitment?

Remember we aren’t worried about social implications, only math. You need to be able to afford your mortgage/rent PLUS all the other expenses associated with owning a home or renting. You can ruin your financial life by buying a house and you can ruin your financial life by renting. It really isn’t about one being worse than the other, it’s about being able to afford one or the other. The worst thing you can do is give into the pressure to buy a house or sign a lease when you are financially unprepared to handle the obligation.