My wife and I were discussing whether her soon-to-be-married brother and his future wife should really be looking to purchase a home right away. Knowing what I know about the couple and my personal opinion about buy vs. rent I took the side of the argument that the couple definitely should not be looking to buy a house right now. The two of them are fresh out of college and from what I know don’t have a whole lot of money saved up. In fact I think they have some debt and are going even further in debt to pay for the wedding and honeymoon. Now at their age there is certainly nothing wrong with being in debt, especially if the reason for the debt is college education and well as much as I promote being frugal in all aspects of your life, you probably should enjoy your wedding/honeymoon as hopefully it’s an only once in a lifetime experience.

Seeing as how they already have a number of debts to worry about and little to no money saved up for a down payment there is no reason to go ahead and pile another huge chunk of debt onto their plate. Not only would having to pay for a mortgage decrease the resources they would have to pay down their existing debt, it likely would give them a host of reasons to spend even more money and run up even more debt for things they really do not need because of the house they just purchased.

When people often compare renting versus buying a house they often seem to leave so many things out of the puzzle.

When you rent you are just throwing money away
You often hear this as the number one argument to buy a home. When you rent all of your money is going to your landlord and you will never see a penny of that money back. Thus you would be much better off owning your own home and yes you have to make big monthly mortgage payments, but you eventually own your house so you really get that money back.

Problems with this reasoning

  • The bank doesn’t give you the money for free. They charge something called interest, which tends to add up, especially on big expensive things like houses. I paid more in just interest last year than I did in rent and utilities combined in an entire year at our last apartment.
  • Property taxes – Property taxes a lone are usually about a half years rent at an apartment.
  • Maintenace – Guess what? When something breaks you have to fix it now. Not only that you have to mow the lawn, shovel the snow, pay for garbage pickup, and kill varmints. This means you now need things like lawnmowers, ladders, power tools, hoses, varmint traps, etc.
  • Insurance – while it’s not going to break the bank, homeowners insurance is often 3-5 times (in my experience) more expensive than renter’s insurance. This is just more money coming out of your pocket when you decide to purchase a house.
  • Utilities – Often when you live in an apartment you get certain utilities for free or in many cases they cost a lot less in an apartment than they do when you own a house.
  • Landscaping, interior decorating, painting, remodeling, finishing off the basement, cementing/blacktopping the driveway, building a deck, staining the deck, repairing the roof, fixing/replacing the furnace or water heater or garbage disposal, etc., etc. You likely won’t have too many of these expenses while renting, but I’ll put money on it you will have most of them if you own a home for any extended period of time. Again more money out of your pocket and into someone else’s.

Just in interest, property taxes, and added insurance costs alone in one year of owning my home I could have lived in my previous apartment for nearly two years. I could have invested all this extra money, used it to pay down debt, or saved it for a major purchase (such as a down payment on a house)

Ok you bought a house, you’ve been “paying yourself”, and now you need to move
If you need to move you can’t just pickup and leave like you can with an apartment. Us young folks don’t tend to have our lives/career paths entirely figured out at this point in our lives, so it’s probably pretty likely that if you buy a house right away you will probably be selling it in the next couple years as you decide to move to take a new job or need a bigger house because your new wife is expecting triplets or whatever the reason. Just from my experience people in their twenties in general don’t tend to stay in the same residence for extended periods of time. So now you have to sell your house which in certain markets may take several months to a year depending upon how the local real estate market is doing. Yep it’s a market just like any other market and in the short run your house price can go down. So now not only do you need to move, the only way you can sell your house is to sell it for less than you paid for it. Guess what the bank doesn’t care what you sell it for and you are still on the hook for the full amount of your mortgage. What’s that you didn’t have enough money for a down payment and the bank let you finance 100% of your house? So now on your $200k home you’ve got a $198k mortgage (you’ve been paying yourself for a good year and a half now ;-) ) and you were just forced to sell it for $185k? Ouch. Oops I forgot to mention that selling your house isn’t free either. In fact it’s pretty damn expensive. The real estate agent gets their chunk (4-6%), legal fees, title transfer fees, other miscellaneous taxes, any repairs that need to be done before the sale is final, etc. Costs of selling your house are often close to 10% of its value. Got a $200,000 house that is another $20,000 that you will never see. Then even after all of those fees you do manage to make a profit, if you happen to sell it after living in it for less than 2 years you have to pay taxes on any gains (official rule is you have to live in it 2 of 5 years before you sell it) also.

If you really break it down the crux of the problem is people need a place to live. In my opinion the cheapest solution to this problem is often to rent, especially if you are disciplined enough to take advantage of the cost savings of renting and put extra money away. It gives you a chance to sit back and decide what you really want in life, where you want to live, and in what kind of house you want to live in. Rushing into home ownership just because other people tell you it’s a smart thing to do probably isn’t the smartest move and could end up costing you a boatload of money and headache in the process. So for me, from a purely financial aspect, renting is a no-brainer.

Ok you got me, this article is entirely one sided and takes a look at many of the negatives of home ownership and all the worst case scenarios. It’s no better than any of those articles or people that say the smartest thing you can do is purchase a home, real estate never goes down. I’ll admit this article isn’t very balanced, but when you are having an argument with your wife you don’t want to be balanced you just want to win :-)

Actually she thought many of the same thoughts, I just think that in many cases so many important things are left out of the buy vs. rent decision that it’s often just as one sided on the buy side. It’s not a clear cut decision financially/emotionally/or however else you look at it. There are pros and cons and every person’s situation will be different and yield a different answer. Just make sure you got all your facts in front of you before you make your decision, because it certainly not as easy as most people make it sound.