The debate of should you buy or rent your home comes up often.
You’ve probably heard “experts” say owning a home gives the opportunity for significant earnings from appreciation. I make the counter-argument that buying a house just for appreciation is a losing strategy.
You’ve undoubtedly heard that renting is throwing money away, and buying a house is a way of building equity.
I’m here to tell you, it is not that simple.
The following is a list of reasons buying is not always better than renting:
- Primary Residences often Don’t Cash Flow Well
- Rent does not have Additional Expenses
- There are Several Expenses to Pay on Top of a Mortgage
- Mortgage Pay-down Doesn’t Happen as Fast as you Think
- Appreciation is often Overestimated
Primary Residences Don’t Cash Flow Well
I’m a real estate investor, and I almost never buy the house I’m living in.
Unfortunately, primary residences often don’t cash flow well because they have one or some of the following attributes:
- New or Newer Home
- Nice Neighborhood
- Good School District
- Low Crime
- High Cost of Living Area
- Near Beach, Lake, or River
By having any of these attributes, they are more desirable, and cause the price to rent ratio to be off. This means rent often doesn’t cover the mortgage.
Let me illustrate this point about primary residences by explaining what I did when I moved to Montgomery, Alabama for a military assignment.
I don’t buy a house unless it will cash flow well as a rental when I move away.
That goes for a primary residence or investment property.
For me, that means it would need to make more than a 7% return on investment, which is what I believe is easy to make in the stock market.
I use the 1% rule to give me an idea if a property will make a good rental or not.