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Why Renting Might Be a Better Investment than Buying a Home

You have probably heard friends and family tell you one of the following:

  • “Renting is just throwing your money away.”
  • “Buying a home is a great investment.”
  • “Home prices are skyrocketing... you have to buy now!”

Unfortunately this advice is not always correct, and in some cases, flat out wrong. Before the 2020 pandemic began, there was already a low inventory in the housing market. The government’s foreclosure moratorium and the increased demand for space due to social distancing has only made this problem worse. Simply put, supply is low and demand is high causing prices to go up quickly. This imbalance will not always be the case.

Real estate historically increases in value similar to the pace of inflation but does not do so in a straight line. During the pandemic we’ve seen home prices skyrocket, causing many buyers to experience FOMO (fear of missing out). In the mid 2000’s we saw above average price growth in real estate, which eventually came crashing down during the great recession.

My wife and I bought our first home in 2005. Ten months later, I received an unexpected out of state job offer, and we sold the home for a 19% gain. We were ecstatic. Unfortunately for the buyer, the great recession occurred, and the home was back on the market for less than what we originally purchased it for a few years later.

Does this mean buying a home is a bad idea? Absolutely not. My wife and I have rented four homes and owned four. If you are trying to decide whether or not to buy or rent, consider the factors below.

Opportunities in the current market.

For someone who is mobile, flexible, and interested in city life, consider the fact that rents have dropped in some cities due to the migration towards the suburbs and rural areas. Perhaps you can lock in a discounted lease in an area you never would have gotten before the pandemic began.

Moving to a new town.

Let’s face it: moving from one home to another is not fun, but would you want to know what’s worse? Buying a home in an area you are unfamiliar with and regretting it a few months later. Each time our family has moved to a new town, we’ve rented for the first 6-12 months. This has given us time to see where we like shopping, what church we want to attend, and poke around neighborhoods within a reasonable commute to work.

Time horizon.

Buying and selling a home has a number of costs associated with it. Many experts believe that you should plan on staying in a home for 5-10 years before the costs associated with buying a home outweigh the benefits of renting. In other words, if you know you will be moving out of town in the next couple of years, don’t bother purchasing a home.

Location and affordability.

Have you heard the saying about the three most important things in real estate? “Location, location, location.” This is extremely important when thinking through the rent vs. buying decision. The median price of a home in California is $700,000 while only $160,000 in Indiana. However, average rents in California are only $1,500 compared to $800 in Indiana. The cost to own in California is 438% more than Indiana, but the cost to rent is only 88% higher. For some individuals, renting and investing the difference can be a great long-term solution. This can also help you stick to one of the most important financial principles that we teach as Ronald Blue Trust advisors: always spend less money than you make every month.

If you know the area, plan on being there for the foreseeable future, and can purchase within your means, then home ownership makes a lot of sense. But make sure to consider and compare the benefits of renting in your area as well, even if it’s temporary. Renting has allowed our family to make more informed home purchases over the decades, and we’ve never regretted it.  

 

Tim Bowman (IWU Alumni '04), CFP®, CKA®
Private Wealth Advisor, Ronald Blue Trust

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