Rent or Buy?


Cost-Benefit Analysis is the term for figuring out if something is worthwhile doing or not. When you analyze a situation and decide that the benefits are greater than the cost, then you may want to go forward. Conversely, if the cost exceeds the benefits, you may decide to wait.

Sometimes when you weigh the benefits against the cost, the benefits are higher, but not high enough. In that case, you might want to increase the benefits or lower the cost before taking action.

These are exactly the thoughts you should be having as you plan to buy your first home.

To help you weigh the benefits and costs of buying vs. renting, this report offers key elements to think through, including evaluating the monthly payments correctly, estimating home ownership costs, weighing location against price, evaluating purpose and home investment strategy, and improving credit and interest rate to decrease payments.

The most important factor when thinking about buying is to not “panic buy.” Don’t jump in just because interest rates might rise or prices might rise. Buy when you are ready and don’t let the market dictate your timing.

1. Costs & Benefits of Renting

What are the benefits of renting?

  • One benefit is living in a property without having to spend great chunks of money to replace the roof or fix the plumbing.
  • Another benefit is that you may be able to rent a type of home or rent in a location that you could never afford to buy.
  • You have no stress or worry about maintenance. That’s the landlord’s job.
  • You can pick up and move without wondering if you can sell your house.
  • If your income drops, you can rent somewhere less expensive.
  • If you are late with a payment, you can discuss it with the landlord.
  • You probably won’t get a serious ding on your credit if you’re a month late.
  • In many places, renting is the only option because there isn’t enough housing for sale, or the prices are beyond reach for the average mortal.


What are the costs of renting?

The landlord charges you X amount and as long as you pay that amount, you get to live in that property. The cost is X. But there are other costs:

  • By renting, you lose the opportunity to build equity (the money you gain if you sell the property). So when you move, you move with no money in your pocket.
  • You lose the opportunity to pay off the house and eventually own outright.
  • You lose the opportunity to put down permanent roots, do what you like to the property, and raise capital by getting a second mortgage or home equity loan.

Costs & Benefits of Owning

What are the benefits of owning?

  • Build equity through rising values and making payments.
  • Pay off the home and eventually have the security of owning outright.
  • Be able to increase your wealth…by selling and profiting, by renting, or by getting a home equity line to use the money somewhere else.
  • Put down deep roots in the house and community.
  • Do what you want to the house…paint it orange and pink if you want (as long as you don’t live in a Planned Community or Condominium).

What are the costs of owning?

  • Monthly fixed and variable maintenance costs are higher than renting.
  • Interest on your mortgage loan.
  • Time involved in maintaining a home that would not be involved when renting.
  • Possible falling values that mean you can’t sell when you want to.
  • Inability to work with the loan holder when you’re late with a payment.
  • Possibly higher monthly payments than would be with renting.
  • Possibly not being able to live in the community you want because you can’t afford to buy there.

Compare Costs and Benefits

Here are several questions that will help you decide if it’s time to buy, or if you should
keep renting.

What can you REALLY afford to pay each month?

Let’s look at an example. (This example uses US$.)

  • Suppose you feel that you can afford to pay $1,500/mo. in a mortgage payment.
  • Add another $200/mo. in utility costs for ownership vs. renting.
  • Put aside a little each month to pay for large projects (painting, new roof, new kitchen, etc). 5% for homes in decent condition—10% or more for homes in poorer condition. That’s $75/month, based on $1,500.
  • Now, instead of paying $1,500/mo, you’re really looking at $1,500 + $275 = $1,775.
  • You have a choice. If you really are only comfortable paying $1,500/mo, you will need to SUBTRACT $275. So your target monthly payment is more like $1,225. That can mean a difference of $40,000 in your purchase price, so it is important to calculate maintenance costs before buying.
  • If you don’t include maintenance costs up front, then the costs will come from somewhere else after you buy—your vacation budget, your new car budget, etc. You could become what’s known as “house poor,” a term that means you have a house, but a lower quality lifestyle.