Conventional wisdom says you grow up and buy a home because that's just what you do when you are a grownup. Now, why would anyone want to be a grownup and have responsibilities is beyond me? But, maybe you like having responsibilities.
Is buying a house still the right decision for you?
Because of my refusal to buy a house, I have discussed why I am still renting instead of buying (a house) with various people over the last few years.
Argument #1: It's an investment
The biggest argument I have heard for owning a home is
It's an investment
According to Robert Shiller, a Yale economist and Nobel prize winner, buying a house is "like a consumption choice, it's not an investment". He says that, overall, the housing market doesn’t have a significant long-term return.
Although I agree with him, you could be lucky and have the housing market in your area explode. But, taking that gamble is probably riskier than investing in the stock market, which has a higher return in the long term.
What you also need to consider is the opportunity cost of buying. When you go to buy a house, there is the down-payment and the mortgages. You need to see if you would be better off by investing in the down-payment.
If your rent is significantly cheaper than the mortgage, you would be better off renting a house and investing the difference. If you plan to pay the mortgage by using the monthly rent, you need to consider that the rent might not be enough to cover the monthly mortgage or that the house might be vacant for some time.
If your main reason for buying a house is an investment and you hope to sell it down the road for a tidy profit, all I can say is
May the odds be ever in your favour
"Hunger Games"
If you have been living under a rock and haven't read the books or seen the movies, they generally are not.
Argument #2: Ownership
The second argument that frequently comes up is that.
When you rent, you own nothing. When you buy, you eventually own the house
~~This is also why most people are baffled by my stance on renting a furnished apartment instead of purchasing the furniture myself.~~I have since changed my stance on this because most furnished places don't come with baby furniture or a place to put them.
Let me start by saying that "When you are renting, you are paying to have a place to live". In most cases, it would be in a neighbourhood that suits your lifestyle.
Personal finance blogger Mr Money Mustache suggests you consider the commuting costs as well. A house in the suburbs of a big city could be far away from your work, costing you gas and vehicle maintenance if you don’t have a public transit option. It probably wouldn’t be too difficult to find a rental closer to your work that could save you money on housing and commute costs. You also don't have to worry about depreciation, repairs and maintenance because of normal wear and tear.
What if your job requires you to move or you want to explore an exciting new opportunity in a new city? Chances are, if you have a mortgage to pay, financial considerations will weigh in, and you will have to forego the opportunity.
Argument #2A
Invariably, someone will counter with the argument
But Ankur, if you buy a house, you will eventually pay it off, and it will be yours
Now only if it was so easy. Most people forget about the payment to the government - the dreaded taxes. Even if you have paid off your mortgage and celebrate thinking that you finally own the house, you realise that property tax still exists. If you still believe you own the house, don't pay the tax for a while and see how fast the government comes after you.
The other cost that people forget is the home maintenance and repairs.
In fact, at one point in time, even we almost fell into the trap and started looking for a house. Luckily, we didn't find anything that we liked. Being the epitome of laziness that I am, I got tired of looking in a few days, and we decided to continue renting.
Argument #3: Tax Savings
The third argument that comes up is
You save on tax when you buy a house
This is one of those classic cases of Penny Wise, Pound Foolish. The tax you save will probably be not even close to the interest you are paying every year. Yes, you do get a tax benefit, but this should not be a major consideration to decide if you should buy a house or not.
Is buying a house for chumps?
This doesn't mean that you should never buy a house.
One advantage of buying a house is that you get to do whatever you want. Customisation FTW. As a renter, you are at the mercy of your landlord to get any changes made.
Owning is also the best way to lock in living costs if you plan to stay in the same place for a long time. After all, rents can go up, and the landlord may just ask you to move out.
Can I afford to buy a house?
So how do you decide whether you can afford to buy a house?
When half of your salary is fed to the house, that means that you must be a lot more judicious with how you spend your money.
"I Will Teach You To Be Rich "
One rule of thumb is that your home should not cost you more than 2.5 times your salary or, better still, your net worth. You should have a cushion between your monthly income and expenses(including your mortgage). You should also not be buying a house if you have a massive credit card debt or other loans that need to be paid off.
If you are buying a house for investment purposes, you should follow the one per cent rule of investment, i.e. Does the monthly rent equal one per cent of the purchase price or more? Some people go a step further and claim that you should follow the 2 per cent rule, but I feel that it is too prohibitive.
Finally, you should remember to add mortgage payments, taxes and maintenance charges into your estimates and make sure it makes sense for you financially before taking a plunge into homeownership.
Conclusion
Although I don't see Gunjan and me buying a house in the foreseeable future, I am not entirely opposed to purchasing a house.
If you buy for the right reasons and make an informed decision, homeownership, whether for yourself or as an investment, can be one of the best things.
However, it scares me how many couples I know have bought into the American/Indian Dream of buying a house without doing the due diligence and then not enjoying their lives because they are worried about the next mortgage payment.
What do you think? Is renting better than buying, or would you rather be a homeowner?
