Which is better: renting or buying a home?

In Credit by CreatingWealthYoung0 Comments

The debate about buying a home versus renting a place is an old age debate that’s been around since mortgages were created. And for the foreseeable future, it will continue to a topic we debate. Purchasing a house is one of the biggest investment decisions most people make along with the biggest debt they will take on.

To be transparent, it’s important I let you know I own a property.   Whether you’re purchasing a home or renting one, the decision-making process for both is similar. Most of our purchase/ renting decisions are 80 % emotional while 20% is rooted in simple math. We like to believe it’s the other way around, particular on such a big decision, but the ratio is still an 80/20 split with our emotions making the bulk of our decisions.

This debate is particularly important for my generation. Why? My generation wants the same things their parents provided them. A home to create memories and a decent job to provide for their kids. The problem for my generation is while there are tremendous opportunities available to us we also face increased difficulty in starting our home ownership dream. Naturally, renting isn’t such a dirty word these days given the Canadian housing market. But let’s dive into the debate.

Rent vs Buy Overview

Preet Banerjee is a financial commentator, who did an excellent video comparing renting vs buying. I love video because it both balance and makes the numbers side of the debate less intimidating. Rather than reading my breakdown, I want you to watch the video and then review my comments after.

 

As you can see from the video, from a numbers point of view, the homeowner isn’t guaranteed a clear win. The renter isn’t a clear winner either as a lot of variables need to line up for the renter. What is clear though is our assumptions about either side isn’t entirely rooted in facts or even supported by facts. The more accurate answer to this old age question as to whether renting is better than buying is; it depends. It depends because there are many assumptions and variables at play in order to determine which option is better. If the correct and honest answer is it depends, then why do we continue to believe one side of the argument is always correct? From my observations, there are 3 potential reasons why one side of the debate continues to be portray as the clear winner.

Herd mentality

Our economic system makes the assumption that given all the necessary facts on a topic, we will make the logical decision based on the facts provided. In the real world though people do not make logical conclusions based on the facts available. Just think about the last major decision you made. It was probably an 80/20 split. When a large group of people are making decisions more on their emotions rather than looking at the facts, then you create a herd of irrational decision makers who actually believe they are making a rational decision because everyone else is coming to the same conclusion.

Whether you’re purchasing a car, a home, or stocks it critical you spend some time looking at the facts and trying to come to a conclusion based on those facts. The debate about renting vs buying is clouded as the herd mentality means getting factual information about which is better is hard and honestly we don’t want to really know the truth.

Timing matters

When it comes to renting vs buying; timing matters a great deal. It’s possible to make a great decision but if the timing is wrong it could be a poor decision. If you purchase a home too soon it might become too much of a burden as you’re unable to save up for an emergency fund, travel, relocate for a job, or build up your investment account early in life. A home purchase too late in life can also make homeownership unappealing. Timing doesn’t get enough attention on this debate. This isn’t timing in the sense of market timing or purchase timing. This is about the individual trying to ensure the timing makes sense for a home purchase. The assumption is usually that getting a home at any point is a great investment. But as the video illustrated that’s not always factually true.

False premises

If you rent, the belief is that you’re wasting your money as you’re giving away rent each month when you could be owning your own place. This argument appears to have a logical premise at first glance. But in reality, it has nothing to do with numbers and more again about emotions and reconfirmation of our decisions. Renting isn’t throwing away your money unless you assume the individual has no other savings plan other than the money that he or she is currently using as rent.

On the other side, you have people who say home ownership is a losing game when you factor in ongoing upkeeping costs and interest cost. Again, the assumption here is that an individual will keep the mortgage for 25 years and the owner has bought a house at their full capacity. It’s unreasonable to assume every homeowner who buys a house does so at their full financial capacity. Some homeowners purchase a home and still have enough cash flow to save towards their retirement or raise their family. The bottom line is we make the wrong assumption about the renter and buys. These false assumptions are made to reinforce the decisions we’ve already made.

My conclusion

The one thing you should take away from this debate is, renting vs buying isn’t a slam dunk for either side. There are a lot of variables that need to line up for either side to claim victory. Secondly, this is an emotional decision/ debate and as such the numbers matter little. Said differently, we avoid looking at the numbers side of things because ultimately we know buying a home or renting is less about the numbers and more about our emotional need that buying or renting fulfills. And at the end fo the day, it’s those feelings of security, pride, ego, flexibility or shelter that matters to us.

Lastly, you probably should air on the side of caution regardless of what side of the debate you side with. If you own a home, you should ensure you have enough money left over to invest and create an emergency fund. This means you don’t view your home as your sole retirement plan. The same goes for renting. Don’t simply rent and then spend your disposable income on vacations or eating out every day. Rather put your leftover money towards investments and perhaps consider buying a home when the timing is right. Diversification is the key to this old age debate.