Should You Rent Rather Than Buy Your Home?

Friends of ours are in the process of downsizing and would like to move to a different, hipper, part of town. (Not in Lexington) As they grapple with the details of freeing up cash for necessary work on their current home, look for a new house to purchase, attempt to decipher mortgage details and, maybe most of all, try to assemble all the moving parts in a sequence that avoids living in an apartment between houses, it can be quite stressful. Amid all of this I asked if they had ever considered renting rather than buying a new place.

As background, this couple is in their early 50’s and, presumably, will live in this next home for about a decade or so, until retirement. At that point, they won’t be anchored to the locations of their jobs and will be free to live someplace completely different.

Cliffs Notes conclusion: In our example there is a slight - $26,000 – advantage to renting over buying but circumstances could easily tilt that either direction. So, this couple should do what they want, what feels right to them. My advice for anyone, however, is to not be deterred from renting if you’d prefer to avoid the hassles of home ownership. We’ve been told for decades that we should all aspire to own our castles. Maybe renting and letting someone else deal with maintenance on the moat and drawbridge is okay.

Here are the details:

Rent: We will assume for these purposes that the rent on a home would equal their mortgage payment including homeowner’s insurance and property taxes – so that’s a wash. After they sell their existing house, we’ll assume they have $150,000 of equity to either apply to their next home purchase or invest if they rent. If they rent and invest, after 10 years at an average annual return of 7%, their original $150k will total approximately $295,000.

Purchase: After a down payment of $150,000, a mortgage of $200,000 financed over 30 years at 4% would result in a principal and interest payment of $954 per month. Over 10 years they would pay $72,147 in interest and $42,432 toward the principal. Assuming the house would appreciate at the rate of inflation (typical) and assuming – a big if – there are no large expenses for repairs of items such as a new roof or new HVAC – the total equity in their house would be $269,000. (The original $150,000 down payment + $42,432 paid toward the mortgage principal + $76,648 in price appreciation)

Comparison: At the end of 10 years they would have $295,000 if they rent or $269,000 if they owned, then sold – a $26,000 advantage in renting.

• A caveat of renting and investing is their investments may not realize average annual returns of 7%. In fact, if they earn average annual returns of 5%, quite possible, the cash from their former home would total $244,334. Almost $25,000 LESS than if they’d purchased.
• A caveat of purchasing in our example assumed no major home repair expenses. Over a decade, that’s a pipe dream. So, the amount realized from their home would probably be less than we project here.
• The federal tax law changes in 2017 removed the ability to deduct mortgage interest on our taxes because the standard deduction was raised so high. In layman’s terms, there isn’t a tax advantage of owning a home anymore for most of us.

Steve Byars, CFP®