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Another Rent/Own

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  • Another Rent/Own

    I was wondering if people would mind commenting on another rent vs buy question. My main question is regarding the philosophy that home ownership is an important part of wealth building. If you'd care to comment on the long term advantage of buying over renting (or vice versa) as a whole I'd appreciate it.

    In terms of my particular situation, my partner and I moved to our current city 5 years when we finished training. We don't plan to have kids, and we are on track to be FI in 5-6 years, but we aren't sure when we may choose to retire. So far we have rented as neither of us has a strong emotional need to own, and we wanted to be firmly established prior to buying. Once we do retire we have plans to spend a lot of our time traveling.

    We live in a highrise apartment and currently our rent is about 6% of our income. I've looked at the price to rent ratio and found the average for our city is well over 20x. From what I have read, this appears to be a decent indicator that renting is a better idea, but I'm curious to hear your thoughts. The market is still pretty hot here, so I agree that the cost of a comparable unit to our current apartment will be >20x annual rent.

    I know there are intangibles to home ownership besides the purely financial reasons, but ignoring those for a moment, I'd be curious to hear thoughts for a situation like ours. We currently invest >50% of income in stock, bond, and REIT indexes, so I wonder if the costs associated with home ownership would actually be detrimental to our finances. I could be looking at it wrong, though, and would love to hear comments.

  • #2
    This is a lifestyle choice.
    Buy when wanting.

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    • #3
      Yeah, if it's well over 20x, just keep renting.

       

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      • #4
        There's nothing wrong with renting. You've got a great handle on your situation and it seems like renting is the right choice for you.

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        • #5
          Partner or spouse? If the former the answer will always be “rent”.

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          • #6
            Purely financially, you are better off renting. But that isn’t really the question. The issue is one of life style as well as your future plans. A home is where you make it. House in the country, suburbs or high rise condo or apartments. Costs of ownership and transaction costs make make changing ownership very expensive.

            Make a purchase when you have decided where and how you want to make your home. Otherwise, you are simply spending on intangibles. The financial term is goodwill.

            The assumption implied is that the real estate market appreciation greatly exceeds investment returns in the long term. Of course, then leverage the real estate. Better returns.

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            • #7
              I certainly don't think you "need " to buy at any point and will probably become FI more quickly if you don't. Sounds like you are in a great spot that works well for the 2 of you, I see no reason to change that unless you want to buy a home. A home is not a financial investment, it's an emotional one.

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              • #8
                If you're happy in your current setup I'd stay put.  With a 5-6yr horizon where things can change, renting makes even more sense.  Keep renting and save hard.  Re-evaluate in 5-6yrs.

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                • #9
                  From a purely financial standpoint, renting will likely give a better return than owning in your situation. This is common in many of the HCOL/VHCOL cities.

                  The financial bromide that "owning is better because renting is throwing money away," is untrue, but is repeated so often and mindlessly by so many broke people, that it has become something of a religious article of faith in the USA.

                  Consider the alternative path taken by Canadians Kristy Shen and Bryce Leung, who became millionaries by, among other things, avoiding home ownership in a VHCOL city.

                  https://www.financialsamurai.com/disowned-for-being-a-millionaire-why-i-still-wont-buy-a-house/

                   

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                  • #10
                    Thanks for all the feedback.  Yes, you hear the "owning is better" thing so often that it makes you question what you consider a reasonable plan.

                    Thanks for the link, portlandia, I'm going to check that out.

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                    • #11
                      The correct life answer - whatever keeps the lady of the house happy. Trumps the correct financial answer offered by anyone.

                      The correct financial answer - I've seen people do equally well financially who rent or own small homes relative to their incomes, and others who own very large homes (as long as it's reasonable relative to their incomes so usually in LCOLA). I personally don't think it makes that much difference in the end since each scenario has it's own set of benefits and drawbacks. More about desired lifestyle and maintenance hassles than financial end result to me.

                      In your scenario with a desire for freedom and likely current MCOLA-HCOLA, it appears continuing to rent and save/invest elsewhere looks like the better option. My desired forever home is much smaller than my current home. Simplicity is a wonderful thing and the goal of many of us as we get a little grayer/wiser.

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