Rent or Buy a House?

by Derek Clark

Rent or buy, that is the question. It is a tough one for many people. If you asked me that question a few years ago I would have replied buy without hesitation for most people. After thinking about it a lot over the last few years, and with the experience I’ve personally had it is not so clear to me anymore. There are pros and cons to both, and there is no perfect answer for everyone. First off a few questions:

1. Do you have any debt?
2. Do you have an emergency fund?
3. Do you have a down payment?

If you have debt my answer would probably be to rent. You should get rid of your current debt before you take out a mortgage on a house. Second is the emergency fund. Do you have 6 months worth of expenses saved up? If not you are probably better off renting for now. Let somebody else worry about the heat or air conditioning going out. Finally, do you have a down payment saved up? How much do you have saved? 5, 10, 20 percent? I’d suggest to put at least 20 percent down, but I think you could probably be ok with 10 percent down. Personally I’ve done less, but I wouldn’t do it again. I don’t plan on buying another house without at least 20 percent.

If you don’t pass the first 3 tests I’d suggest sticking with renting for now. If you’ve passed those, let’s look at some of the other things to consider:

1. Are you single, engaged, or married?
2. Do you have a steady job?
3. Are you new to the area?
4. Do you like the area you are in now?

First off what is your relationship status. If you are already married this is not a problem. Both spouses will be a part of the decision process. Are you getting married in the near future, or would you like to? You might end up buying a house that your future spouse will hate. This is one of the mistakes I made. I bought a house and then got married about a year later. My wife doesn’t hate our current house, but she doesn’t really like it either. I would have been better off renting until we got married and then picked out a place together.

Do you have a steady job? Is it safe? If you are unsure of your job situation it probably isn’t the best time to be buying a house. Rent until you are more sure.

Did you just move to a new area for a job? I’d suggest renting in this situation until you get to know the area better. Living in an area for a few months will help you decide where exactly you want to look for a house. Related to this, do you like the area you are in now? If you don’t like it why buy a house in the area? Look for a place you like better and find a job there. No reason to tie yourself down in a place you don’t like

If you’ve passed everything so far you are getting closer to the decision on buying vs. renting a house. At this point cost is a big factor. Are houses in your area priced reasonably? How is the rent? This is some research you will have to do. Do the math and consider what type of house you can afford to rent and buy in your area, and how those compare to what you actually want.

Finally, and this is something I’ve recently changed my thoughts on, is the house you are looking at something you could live in forever? Are you looking for a “starter house” or your “dream house?” I bought my current house with the intention of staying in it for 3-5 years. Now I realize that was a terrible idea. Housing prices in my area have crashed since then and wiped out my down payment and then some. If I would have put 20 percent down, I’d be just barely above water. This means selling my house at the 3-5 years I wanted to is going to be a losing proposition. I can still easily afford the payments, so it isn’t a big problem, but my wife and I don’t want to stay here for 10 years (or 5 for that matter).

If you are willing to stay forever, the current value of the home means nothing. If you want to sell in a few years, the current value is very important. This has lead me to a new opinion on home-buying, if you aren’t willing make this your forever home you should seriously consider renting instead. My wife and I have been considering moving to a place that we both will be happier with, but I’ve recently reconsidered this. We aren’t in a position to put 20 percent down on anything either of us would consider staying in forever, so buying something else to stay in for 5 years just doesn’t seem like a good idea anymore. We will either stay where we are for longer than we’d like, or rent something that is in between while we save up for something we’d be willing to stay in longer.

Many people have really liked the idea of a starter house recently. It worked great when housing was in a bubble and houses went up 20 percent a year, but when prices behave normally it is not nearly as good an idea. As it turns out, it is a terrible idea when you are on the other side of bubble.

Rent or buy? It depends. Not only on the things I’ve mentioned but many others. If you’ve passed everything I’ve mentioned you should probably be leaning towards buying. If you do go that route, I suggest paying off your mortgage early. Get completely out of debt as fast as you can. I can’t wait to get to that point so I can work on baby step 7!


twentysomethingmoney January 6, 2011 at 8:23 pm

I have a student loan, and am trying to pay that down before even buying a home…. at that point, I’ll be debt free, and in a much better spot to pay the monthly mortgage payments at an accelerated rate.

lovely leverage January 7, 2011 at 10:45 am

Wow there are so much things to consider! You have some really good questions to help people make that decision. For me, I bought my house with my hubby last summer, it was intended as a flip but we realized we needed a place to stay for ourselves (no longer need to live with parents), so we kept it and made it our principal residence. We rent out the basement right away to collect extra income which helps us to pay off more than half of the mortgage.

Andrea January 9, 2011 at 12:19 am

Great post, I think every potential home owner should go through this type of list to see if they’re really ready to buy. I’ve made a few mistakes along the way myself, that got me to where I am today so I’m not sure I regret it all completely… but some things I would have done differently. My current place is NOT my forever home and my next place will definitely be that with at least 20% down.

Daisy January 16, 2011 at 11:19 am

Well, I’m lucky. My family is in the carpentry & building supply business, so renovating = cheap & easy. We wouldn’t have to hire out, and most renovations (if done properly, up to date) add value to a home. Plus they’d make me want to stay in the house for a longer period of time.
But, I can see how not being married would make the housing situation complicated.!

Andrea July 22, 2012 at 7:25 am

Fantastically encrypted..!! Well in this case I consider myself to be lucky enough as We had bought our house 10 years back for which my dad had taken all initiative, much before I got into debt problem. But if I think about the present situation, I wouldn’t have been able to afford a new house, Keeping the current scenario in mind, I had to go for a rented one. Basically It depends upon the situation which leads a person to take a decision.
Andrea Jones

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