24 January 2014

I hear often that people are sick of renting and want to buy a house because renting is just throwing away money.

This idea is highly beneficial to mortgage bankers, but is not always true. Very often you’re throwing away much more money by owning a house than you would be by renting. You’ve probably heard many reasons why buying is good, so here are some reasons buying might be a bad decision.

For the first years of your mortgage, most of the money you pay each month is applied towards interest on your loan. All that money is thrown away, no different from money you pay to a landlord. If you sell within a few years of buying, you’ll have saved almost no equity, and whatever you have managed to save will be eaten up in transaction fees.

Contrary to popular belief, real estate is not that great an investment. The long term return on real estate is lower than stocks or bonds. Yes, there are people who bought houses for cheap in Soho or the Hamptons that are now millionaires, but there are also people who bought houses in Detroit, California, Florida and Las Vegas who lost their life savings.

When the economy is great, and lots of people want to buy houses, the prices go way up. When things are bad, and you want to sell, odds are a bunch if other people also want to sell, which means you’ll have a tough time getting a good price. Many people will buy houses at the top of the market, and try to sell them at the bottom of the market.

Buying a house can also limit your job prospects, because it locks you into a city or neighborhood, and doesn’t allow you to pursue opportunities too far away from your house. People who rent are more mobile, and able to move neighborhoods or cities when necessary.

I hear too many people saying that real estate in New York is always going to go up. Just a few years ago people thought real estate everywhere always went up, and when that turned out to be wrong, it nearly destroyed the world financial system. If we get another Hurricaine Sandy, your Financial District or Hoboken apartment might be underwater, literally and figuratively. Also, there may not be enough rich people in the world to sustain $2,000 per square foot apartments.

It’s just a math problem. But it’s a math problem you need. Luckily, the New York Times is here to the rescue. They have a calculator that tells you whether it’s cheaper to rent or buy in your neighborhood. You put in the house price, rent cost for an equivalent house, monthly fees, and tax rate (they have defaults), and the calculator tells you how long you need to stay in the home to make buying cheaper than renting.

Some places in the world it’s better to buy than rent, some it’s better to rent than buy. Generally, the most important factor is whether you intend to live in the house for the rest of your life. If you do, it’s often better to buy. If you only plan to live in the house for a few years, it’s probably better to rent.

Before you buy a house, check out the calculator here.