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 grown-up and have responsibilities is beyond me? But, maybe you like having responsibilities. Is buying a house still the right decision for you? In my steadfast refusal to invest in a house, I have had to discuss why I am still renting instead of buying (a house) with various people over the last few years.
The biggest argument I have heard for owning a home is
It's an investement.
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 great 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 the down-payment.
Also, if your rent is significantly cheaper than the mortgage, you would be better off renting a house and investing the difference. If you are planning 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 empty for some time.
If your main reason for buying a house is as an investment and you hope to sell it down the road for a tidy profit all I can say is - To quote from the Hunger Games - ”May the odds be ever in your favour”. If you have been living under a rock and haven’t read the books or seen the movies, they generally are not.
The second argument that frequently comes up is that
When you rent, you own nothing. When you buy, you eventually own the house.
I think this is also why most people are baffled with my stance of renting a furnished apartment as opposed to buying the furniture myself.
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 is more suited to your style of living and what you consider important.
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.
Invariably, someone will counter with the argument that
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 you celebrate thinking that you finally own the house, you realize 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.
In fact, at one point of time even we almost fell into the trap and started looking for a house. Luckily, we didn’t find anything that we liked and being the epitome of laziness that I am, I got tired of looking in a few days and we decided to continue renting.
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 that you save will probably be not even close to the interest that 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.
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. Customization 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.
So how do you decide whether you can afford to buy a house? One rule of thumb is that your home should not cost you more than 2.5 times of 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 percent rule of investment i.e. Does the monthly rent equal one percent of the purchase price or more? Some people go a step further and claim that you should follow the 2 percent 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.
Although I don’t see me and Gunjan buying a house in the foreseeable future, I am not completely opposed to buying 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 that have bought into the American/Indian Dream of buying a house without doing the due diligence and then not being able to enjoy 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?