Renting vs. buying is a hot subject and there are clearly two camps. Regardless of different conversation one may have, the demographics of the interlocutors or the dichotomic data, a consensus is rarely met.
Along with my research, I took the time to have a bunch of conversations with colleagues, or with family and friends and there was never a consensus. I guess I must be reaching that age where the people around me are asking these questions.
What is for sure is that the Millennial Generation I am a part of is asking these questions concerning what is thought of as adulthood. Should I buy even though I’m not sure I can afford it? Should I get married now or save and wait? How can I do this and continue to pay off my student loans with my current salary? Where do I want to be in 5 years?
But before getting to the nitty-gritty of this article, take our #TrovitQuiz to find out if you should rent or buy!
Whatever the reasons, I have confirmed my position as a renter for life. I just can’t come around to see how the advantages of home ownership outweigh what renting has to offer. But as the Curious George that I am, I looked into both sides to make sure my opinion was informed. And the conclusion I arrived at is: It depends.
Let me break it down and explain. This decision depends on many rational factors, but the most important factor is what you want in life.
- Size: When people start to consider buying, they usually have been renters. This means they most likely want to upsize when becoming a homeowner. If we assume they want to stay in the same area, this means more m2 at the current market price. This is a cost most people don’t consider. They just imagine what the current money they spend on rent can get with ownership and forget the costs of more space.
- Real Estate Market: Since the financial crisis that hit some countries harder than others, the real estate market hasn’t yet recovered to its pre-crash level. “This is the time to buy” – one may argue. Sure this may seem like a good idea. But the volatility and instability of your local market have to be taken into account. Will it really take off again or stay in the actual slump? How will the market react to another crisis? When it does recover, will the owner be at a point in their life where selling is an option? Were maintenance and upgrades carried out regularly so the house gained value or at least didn’t lose value? How much has rent gone up in the area? Are there rent controlled options?
- Upfront costs: How much can be put down? What if the downpayment was invested? What interest rate are available for a mortgage? Is the property furnished or how big is the budget for furnishings? Is it easier to handle a security deposit, a month’s rent and other fees better then a down payment?
- Fixed Costs: How much maintenance, renovations and upgrades are needed based on the age of the house? How much are the property taxes in the area? What about Co-op or condominium fees? How much is the real estate agent taking in fees and how much are closing fees? How much is property & mortgage insurance? What real estate tax shelters exist in the country? What extra charges exist for pets and parking?
The biggest influence I found in this question is what people want in life. How they imagine their future. Some want the security of having a place owned outright in case things go belly up and they have no government pensions. Some people have settled into the life of the place they currently live, be it close to family and friends or easily accessible. Others think it is a good investment and that they will sell for a net profit. Having the liberty to do what anything is another selling point for homeownership and not relying on landlords to get things done.
However, others see it as a money pit that is inflexible towards the curveballs life can throw. The hassle of managing a property and being responsible for care and maintenance is a burden that some do not want to take on. The economic uncertainty is also a major turnoff for others.
The general conclusion from all I read and the people I talked to tipped the balance in favor of renting in most cases. One of the most speaking examples is what a family member said during one of these conversations. For context, he is a medical professional not that far off from retirement. As a young professional he bought a property where he has lived and worked. In this conversation he said that buying this property is a regret he has. Now, as retirement approaches he doesn’t want to spend his golden years in that city and would much prefer to move around more freely. The only thing is that there is no market for it and selling it to break even is impossible. His advice: “Don’t make any decisions that are irreversible”.
I have to agree with this conclusion personally. I don’t see how I or anyone would like to live in the same house in 5 years and even less in 30 years. With families in mind, the budget of someone in their 20’s generally isn’t enough to anticipate a family house in an area that’s close enough to work and good schools. The other option would be purchasing and selling multiple homes as the family needs grow. But this brings on a whole other level of financial obligations.
Imagine the retirement pension you could have if you invested all the money burned on buying and maintaining a house. If there is anything a regular person can easily take away from Warren Buffet, it is his advice to invest in low fee, unmanaged index funds. He made a decade long bet against active managed funds by betting 1 million dollars that index funds would outperform actively managed funds. By the end of 2015, Buffett’s index fund was up 65.7% vs. the active management fund’s 21.9%. So now imagine if the 100,000€ downpayment that had been saved up was invested in a fund like this.
In the end:
Whatever your outlook on life is, it is respectable and the right decision for you only works for you. This decision is yours but it must be informed and realistic considering the actual situation. At Trovit we are here to help whether you are looking to buy or rent and we will provide the best insight to the market we can.
Here is some food for thought with a video that explains how to evaluate the rational factors as well as an online calculator & a rather sensible critic of the calculator that can help you get more personalized numbers. The last thing I share with you is the experience and insight from the architectural and urban designer Ben Pentreath.