Should I Buy a House or Rent?

The debate of should you buy or rent a house comes up often.

I’ll admit, my view of money, investing, and real estate is not in line with mainstream thinking.

But that’s who I am.

It’s the point of my entire website and my entire mission.

To teach that traditional thinking on money, investing, and real estate is flawed.

If you take your advice from the best-selling books, most popular magazines, and mainstream media, you are going to make some financial mistakes.  You’ll miss some important points.

You’ve probably heard “experts” say owning a home over the long term gives the opportunity for significant earnings from appreciation.  I will make the counter-argument that buying a house just for appreciation is a bad idea.

You’ve undoubtedly heard that renting is throwing money away, and buying a house is a way of building equity.

Well maybe not.

I’ll make my case.

Next, I’ll talk about the only situations where I would buy a house, which are:

  • When the purchase price and rents of the house allows it to perform well as a rental property
  • When you plan on living in the property long term, want to own it, and understand it isn’t that great of an investment

Whether or not you should buy a house or not is a simple question to me:

Is buying this house a good investment? 

In other words:

What is the opportunity cost of investing in this house over other similar options?

I have a decent background in investments, having been a licensed stockbroker before I came into the military.  I speak (or write I guess) with a background both in real estate and investments.

The S&P 500 Index has grown at a rate of approximately 7% a year since 1928.  You can stick money in this fund, and let it compound and grow for you.  There is no work, almost no fees, and it’s the easiest money you’ll ever make.  Essentially, it’s money you earn for doing NOTHING.

If I can get 7% growth for doing nothing, I want to make sure any venture in real estate, which requires significant work, time, and stress, makes at least this much.

For that reason, I don’t consider buying a house a good investment unless it will make more than 7% per year.

Should I Buy or Rent – The Appreciation Myth

In certain markets during certain years, real estate can appreciate at rates better than 7%.

But there is a catch.

Nobody knows when, where, or for how long that appreciation will happen.

No one knows when it will end, and when it will reverse on us.

I’m already hearing real estate investors talking about a bubble again!

To understand whether you should buy or rent a house, we need to first understand the main argument many people make for this decision.


I will attempt to dispel the appreciation myth here.

I need to break the popular misconception that lots of money is made in real estate from appreciation.

It’s far less than you think!

I’ll back this up with a real-life example from my first property

We all likely know somebody who made a lot of money buying real estate at the right time and watched it grow astronomically year-over-year.  This happened to a lot of people who bought homes in certain hot areas between 2001-2005.  It happened to me in Alexandria, VA with a townhouse I bought in 2003.

Conversely, having all lived through the burst of the bubble in the late 2000s, the lesson of having the market go down on you when you are highly leveraged is probably not that hard to comprehend, and we understand how it financially ruined many people.  It almost ruined me on new construction I purchased in 2005, and the $900,000 2-bed / 1 bath I almost bought in Monterey, CA in that same year.

That was a close one!

The average annual home price increase (appreciation) for the U.S. during the 1900-2012 period was 3.1%, which is only slightly better than the inflation rate of 3% over the same time period.

Bottom line.

The best you can say about appreciation in housing is that it will keep up with inflation, but unlikely to do much better.

The idea that you are going to buy your house at the right time and location and take advantage of that huge jump in the market that everyone is talking about is naïve.

Once you hear about those wild appreciation jumps in the news, and hear about your friends that bought in Florida at just the right time, guess what?

It’s too late!

And how did your friends know?

They didn’t.

They happened to buy at the right time.

It was luck.

Maybe they bought and it went down.  Now it’s not luck.

It’s bad luck!

The hype about making big money off appreciation in real estate is just that.


It sells magazines and promotes clicks on websites.

It sells books and seminars and infomercials.

It makes the people that provide that content wealthy.

But don’t believe the hype.

It’s all smoke and mirrors.

There are lots of magazines, real estate agents, and other so called “professionals” that make their living off pretending they can predict where appreciation will occur, but they are guessing.

Some of them might think they know, but they don’t.  It’s just like those people that think they can pick stocks that are going to be winners.

buy or rent a house day trading sucks

Or those people that think they can day trade (the scariest of them all).

When and where massive appreciation will occur, just like and when and where stocks will skyrocket, are all matters that are far more left to chance than most people want to believe.

It’s out of our control.  It relies of variables that are impossible to predict until it actually happens.  There is a massive industry devoted to this type of guessing, but at the end of the day, it’s all just prediction.

Even weathermen will be far more accurate.

buy vs rent weatherman

If someone tells you they are buying real estate in a certain city because they think it will raise quickly in value, you need to understand this is a risky strategy.

It is a gamble.

This is what got people in trouble in Miami and Las Vegas at the end of the real estate bubble.  It’s what got me in trouble with the new construction I bought in Washington D.C. at the same time.

To me, it is not financially sound to buy real estate with the desire to cash in big on a large amount of appreciation.  The odds are against you.  The odds say you’ll get on average 3% per year.  Going for more than that is just like playing craps in Vegas.

You’re just rollin’ the dice.

Buy real estate that cash flows well.  If you also get massive appreciation, like I did on my D.C. townhouse, so be it.

I think I’ve beat that dead horse enough.

Appreciation on My First Property

Let’s talk about the first property I ever bought.  I made a FORTUNE on appreciation when I bought this place.


Real estate rules!

I bought a townhouse in 2003 in Alexandria, VA for $280,000.  This is right next to Washington, D.C.

I didn’t sleep for weeks and was worried I was overpaying.

Boy was I wrong!

Two years later, my house was worth $400,000.

That’s 42% appreciation.


Obviously, I’m pretty good at this real estate thing.

Everyone should invest in real estate. Appreciation will make us all rich!

Hold on a sec…

I’m in the military, and I ended up moving away and turning that house into rental.

I rented it out for $2000-$2400 a month over the next 13 years.  It made 3-4% ROI.  Very high taxes, HOA fees, lots of upkeep.  Not a great investment as a rental property.

I sold that property in 2016 for $400,000.

Yes, that should surprise you.  I sold it in 2016 for what it was worth in 2005.

Essentially, over a 13-year period, I saw an increase in price of 42%.

They say inflation is roughly 3% per year. 3% X 13 years = 39%.  That would mean my increase of 42% barely kept up with inflation.

This is historically the case with real estate.  It keeps up with inflation, but that’s about it.

I actually paid off the 30-year mortgage early.  I did it in 7 years.  But let’s consider this.  What if instead of paying off that mortgage early, I would have invested all that money in the S&P 500.

As you remember, the increase in the price of the house for 13 years was 42%

For that same period (Jan 2003 – June 2016), the total S&P 500 Index return with dividends reinvested was 129%. (  That means theoretically, $280,000 would have turned into $641,200.  That’s quite a bit better than the $400,000 I got from appreciation.

This is not a perfect comparison, but I am illustrating the point that buying a house has opportunity costs.  When you use your money to buy a house it means you are not using that money for other things. It’s tied up in that investment and not a better one.

Money invested in a house making 3% a year in appreciation is not invested in the market making 7% in the S&P 500 or maybe in another investment opportunity making more.

Looking back and crunching the numbers, I realized two things:

  1. The amount I made from appreciation was far less than I expected.
  2. The amount I made from having that property as a rental was far less than I realized (barely 4% ROI).

If I had it to do over again, I would have rented in Alexandria, VA instead of buying, and invested any extra money I had in the S&P 500 Index instead of paying off my mortgage early.

Read a more in depth look at appreciation here:

What You Didn’t Know About Appreciation in Real Estate

But Renting is Throwing Away Money, Right? 

Well, at least that’s what the experts say.  That’s what mainstream media is always screaming at us.

After all, home ownership is the American dream, right?

Paula Pant of Anything wrote an article that compares buying to renting that I recommend checking out.

Let’s take a closer look at this.

We’ll assume that Rob the Renter is renting a property for $1000 a month.

Bob the Buyer is buying an identical property and his mortgage payment is $1000 a month.

I’m making these payment equal for ease of comparison.  Mortgages and rents are rarely equal in price, and this will vary by location.  It’s more important to understand the fees that may or may not go along with each type of payment.

We need to understand a few important things about Bob the Buyer’s mortgage payments.

People like to say when you make mortgage payments, you are building equity each month.  What you don’t realize is for the first several years of the loan, building equity happens at a much slower rate that you imagine.

If you look at the example below from a $100,000, 30-year loan, the first payment only has about $100 dollars of the $600 payment going towards the principal.  84% of the payment goes to interest.  The 12th payment is only slightly higher.  It inches up slowly from there.

Even after 15 years of payments, more than half of each month’s payment still goes to interest instead of principal.  Look at payment 180, which is at the halfway point.


PaymentPrincipalInterestPrincipal Balance


If you end up buying a house and then selling it after 5 years, the amount you’ve paid down in principal combined with the amount you’ve gained in appreciation will probably underwhelm you!  I wouldn’t go shopping for a sports cars quite yet.

That combined with all the transaction costs of buying and selling will probably put you in a worse financial position compared to renting.  It depends heavily on how much appreciation you got in that five years.  Maybe those weren’t a great five years for that particular location.

Buying is by no means a clear winner financially.

Also, even though Rob the Renter and Bob the Buyer’s expenses appear to be equal on the surface (both $1000 a month to live in the house), renting may turn out to be cheaper.


Rob the Renter has no additional expenses beyond his rent each month.  He maybe pays a small fee for renter’s insurance, but everything else is included.

If his dishwasher breaks, he calls his landlord.  If his roof starts leaking, landlord.  He doesn’t pay taxes on the property and he doesn’t pay HOA fees.

The same is not true for Bob the Buyer.  Even though his mortgage payment is $1000, there are other expenses above and beyond this amount.  This is not necessarily all-inclusive:

  • taxes
  • insurance
  • repairs/maintenance
  • capital improvements
  • HOA

Verdict:  A renter may have lower expenses over a buyer and be able to invest the surplus or do whatever else he wants with that money.

I’m not saying renting is always superior to buying.

I am saying that it is not as clear cut as you previously assumed, and you should consider the following information:

  • Appreciation historically barely keeps up with inflation (only 3% per year)
  • Chasing the wild appreciation that everyone keeps talking about is a fool’s errand
  • Principal pays down on mortgages far slower than you realize
  • There are large hidden costs on top of the mortgage payment
  • There are advantages to renting because no costs on top of rent

So Rich, does it EVER make sense to buy a house?

Hell yes it does.

I own several properties.

But I don’t always buy the house I’m living in.  In fact, hardly ever.

Let me illustrate this point by explaining what I did when I moved to Montgomery, Alabama for a military assignment.

I don’t buy a house unless the purchase price would make it a good rental property.  That goes for a primary residence or investment property.

For me, that means it would need to make at least an 8% return on investment.  I would want it to be a better investment than just sticking my money in the S&P 500 Index fund I discussed earlier.

I use the 1% rule to give me an idea if a property will make a good rental or not.

The 1% rule essentially means if a property will rent for 1% per month or more of the acquisition price, you can consider it for a rental.

The house my wife liked in Montgomery was in a decent school district and a safe neighborhood where many other military families lived.  It listed for about $179,000, but rented for about $1350 a month.

To pass the 1% rule, this house would have to rent for 1% of $179,000, or $1,790 a month.  $1,350 is not enough.

It didn’t pass the 1% rule, so we rented it instead of buying it.

Why?  I knew that if I had to move out of Montgomery soon (which was very likely because I’m in the military), this house would be a poor investment as a rental property.   I was better off renting.

I later realized there were other neighborhoods in Montgomery, Alabama where I could buy houses for $45-$60,000 and rent for $750-$900 a month.  These surpassed the 1% rule and would make good rental investments.

The problem was, these were in neighborhoods we wouldn’t be comfortable living.  This is how I could end up renting in one neighborhood, but buying investment properties in another neighborhood in the same city.

These investment properties passed the 1% rule, and I ended up buying six properties over the following eight months.  I did this even though I was renting the property I was living in.

It made financial sense to rent the property we wanted to live in, because it wouldn’t do well as rental.  We knew this by first applying the 1% rule.  It made sense to purchase the investment properties in a different part of town because they would perform well as rental properties.

Here is my detailed post on the 1% rule and how to estimate how much money your rental property will make.

I only lived in Montgomery for a year.  I continue to buy houses in Montgomery to this day, even though I don’t live there.  As long as I can make the numbers work, I’ll keep buying!

I have a real estate agent, property manager, and other necessary people on the ground in Montgomery to make my continued investment there possible from out of state.

In my case, I’ve actually been investing in real estate from out of the country for most of my career.

But I Just Want To Buy This House!

 There is a final category where I believe it’s ok to buy a house instead of rent.

It’s when you understand that buying a house is not a great investment.

Knowing that, you plan on living in this house for a long time, and you want to own it.

The longer you live there, the better chances you have for decent appreciation and satisfactory mortgage pay down.

In that case, go ahead.

You’ll get no argument from me.

I currently own 20 single family homes that are totally paid off.  I wrote a long article explaining a lot of what went into that.  I did it in my spare time.  You could too.

The Complete Guide to Real Estate Investing

Rich on Money

16 thoughts on “Should I Buy a House or Rent?”

  1. Solid reasoning and explanations, thanks for sharing.
    I like how you have laid out the logic of each case and given examples. It’s really amazing to see how effective the ‘common wisdom’ is in convincing folks that buying is always the right answer. Great to see someone challenge the view with well reasoned though. Best wishes Sir!

    • Kate!

      Thanks for commenting. That’s a glowing endorsement coming from you! Your site is packed with amazing info for anyone in the military. I really appreciate it!

  2. My wife and I are selling our home. It is paid off. We are selling for financial reasons. We have experienced significant loss of income. We are in our early 60’s. Neither are 62 or older to consider a reverse mortgage. We will use about 70% of proceeds to pay off all debt.

    My wife receives a SSA disability check. I do work full time.

    We will live on the SSA check only. In the future when one of passes away the budget will be based on one SSA check. No significant changes will have to be made by the surviving spouse.

    My income will be split in 2 ways. 1- adding to 30% from sale of house. Purpose is down payment of new Home. Reading your article I will give significant thought to your suggestions. Second part will be emergency fund first. Once established travel/vacation/hobby

  3. So much great information in this post. I have a friend who did something similar to you – bought multiple rental properties instead of buying a home, and the income from it more than covered his rental. Eventually, he ended up buying his own home not as an investment, but for the purpose of putting down roots with the full expectation that they would be in that house for a long time. The income from the rental properties still covers his mortgage. Not a bad way to live…

    • Passive Income, Thanks for the Comment. I’m all about looking at the numbers and seeing what you are actually making. A lot of people trick themselves into thinking their rentals are making money when they are actually coming out of pocket each month.

  4. Great article. Simple but so effective. I can’t wait to buy my first intelligent rental property using this method. As a servicemember this is very valuable info.

  5. Another idea is buying a multiplex or sharing your house on Airbnb to help pay the mortgage. This would help offset home ownership cost but also give you upside advantage if there is strong appreciation.

  6. Hi Rich, thank you for detailed explanation, I first heard of you from afford anything and came to your blog. Great content!! thank you for sharing.

  7. Thank you for the informative and thorough analysis Rich! There’s a lot more for me to learn reading the articles you posted. I also bought a rental prop in Montgomery, AL as long distance investor.
    However I bought it as a turnkey and I know you’re not a big fan of it. I bought it before I ran into your blog. Wish I did .

    • I supposed I’d be a fan if the turnkey property worked out awesome for you and you made a ton of money. That’s highly unlikely, however. Good luck in the future with real estate and hope the blog helps.

  8. Thanks Rich,
    for highly informative and eye opening article. I understand you rationale of not buying house if it dosent give you 8%+ ROI.

    i am a new investor and would like your perspective on the following argument.

    several years ago i ended up buying a home for 235,000. And when i sold it after 7years i ended up getting 85,000 capital gains. here is the argument:

    if i had bought this house with cash. 7% of (S&P comparison) 235,000 would be 16,450/year X 7 years = 115,150. Bad decision to buy the house

    But, instead of full cash, i ended up putting 25% down with 1200/month towards mortage (PI&escrow)
    7% on 25% down payment = 4,112.50/yr X 7 yrs = 28,787.50 +
    7% on $1200/month X 12 = 7% on 14,400 = 1,008/yr X 7 years = 7,056
    3% appreciation on 25% downpaying = 1,763/yr X 7 years = 12,338
    total gains at 7% oer 7 years = 48,181 compared to 85,000 that gained = 13% YOY
    in that scenario buying house was a better idea.

    would you agree?

    • Your scenario is over, and it’s easy to look back and say what you should have done. If appreciation would not have occured, then you would have been better off in cash.

      Nobody knows the future or what will happen with appreciation over a 7 year timeframe.


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