Why I Decided to Buy Instead of Rent
Many of us grew up dreaming of owning our own house some day for a variety of reasons. Maybe somewhere along the way, a seed was planted in your mind that buying a house is part of the American Dream. Or maybe your parents owned their own house, and you simply assumed it must be the best path for you, too. Well, maybe. Maybe not. To help you make the right decision (and it’s a big one), let’s put those societal factors aside for a moment and focus on the financial aspect of buying versus renting.
The primary question we need to ask is, “Is renting cheaper, or is paying for my own house cheaper?” First, let’s list out the typical costs for both scenarios.
| Renting | Owning |
|---|---|
| Monthly rent | Monthly mortgage |
| HOA (usually included in rent) | HOA |
| Utilities | Utilities |
| Cable | Cable |
| Water | Water |
| Renters insurance | Homeowners insurance |
| PMI (private mortgage insurance) | |
| Property taxes |
Obviously, costs can vary drastically in each scenario, depending on what and where you rent or own. So let’s try to make our comparison as fair as possible by making a few assumptions:
We want to live in a place with 1000 living square feet.
We want to live in a community with an HOA so we don’t have to handle much external maintenance. So in the owning scenario, let’s assume we’d end up buying a condo or townhouse (it’s less common for single-family homes to have an HOA, but they can). That means the HOA cost is a wash between both scenarios.
Utilities, cable, and water usage are also a wash. We use them equally in both scenarios.
All that said, the main difference in costs are rent vs mortgage, renters vs homeowners insurance, and the added cost of property taxes (and maybe PMI) in the owning scenario. Now that we’re aware of the cost differences, let’s examine my first hand experience when I was weighing renting or buying.
When I first moved to Silicon Valley in 2012, my rent was $1450/month. I don’t remember my exact renters insurance cost, but it was probably about $200/year. Later that year, I decided to buy my own 2bed/2bath condo for $390K with a 20% down payment (therefore, no PMI) and a 4% interest rate. Let’s compare the costs between the two to see why I decided to buy.
| Monthly Costs | Renting | Owning |
|---|---|---|
| Rent / Mortgage | $1,450 | $1,490 |
| Insurance | $15 | $50 |
| Property Taxes | $0 | $350 |
| Total | $1,465 | $1,890 |
My monthly costs increased $425 when I moved out of my apartment and started owning my own condo. However, I house hacked my home and rented out one of my bedrooms for $1K per month! That took my monthly costs down to $890/month. So at that point, I was actually saving $575/month compared to when I was renting! What a deal. And now you know why I decided to buy instead of rent!
Fast forward to today, and my condo’s market value jumped from $390K in 2012 to $850K in 2020! So the table above is very much outdated. If I were to consider renting the same apartment vs buying my condo for $850K today, let’s look at what the numbers look like.
| Monthly Costs | Renting | Owning |
|---|---|---|
| Rent / Mortgage | $3,000 | $2,959 |
| Insurance | $15 | $50 |
| Property Taxes | $0 | $725 |
| Total | $3,020 | $3,734 |
As you can see, not only have home prices skyrocketed in the past 8 years, the cost of renting has gone up a ton, too. If I house hacked my condo again, I could probably pull in $1,500/month by renting out a bedroom today. So I’d still be saving $786/month in the owning scenario!
I can think of two more major advantages of home ownership: Principal paydown and tax deductions. Most people have a 30-year fixed mortgage on their home. As part of your monthly mortgage payment, part of that payment is interest to the bank, and the other part is called “principal.” Principal is money that belongs to you once you pay off the loan (or sell the property). So after paying your mortgage for 30 years, the mortgage is paid off and you own the home outright. If you rented for 30 years instead, you’d own $0 in property. Looking at it this way, I’d definitely rather own than rent. The other major benefit of home ownership is that you can deduct mortgage interest and property taxes against your income. As a renter, you just pay rent, which yields a grand total of $0 in write-offs.
For most people, the hardest part about making the jump to home ownership is likely that hefty down payment. For the $850K condo I described earlier, a 20% down payment comes out to a whopping $170K! It may seem like a mountain to climb, but I’m a strong believer that financial discipline and budgeting will ultimately get you where you want to be. So if becoming a homeowner is on your bucket list, be diligent to stick to your monthly budgets and track your savings rate to know how long it will take you to accumulate that down payment.
