To Put It Another Way

September 25th, 2014 by Potato

Once again I saw the “but if I buy a house I get something back. If I rent I get nothing back. Even a small return is better than zero…” trope about renting vs. buying. This time I answered it slightly differently, and maybe this explanation will stick:

You have to look at the whole picture.

Give me $10. I will buy you a bag of chips and give you $2 back. Hey, a small return and a bag of chips, that’s good, right? But if you can just buy the bag of chips for $5 you’re better off — you can hold on to $5 out of your $10, rather than just $2. There’s no “return” in the second case, but you put out less to begin with. In both cases you get delicious chips.

So it is with housing. The key thing to appreciate is that all discussions of “building equity” and what-not are distractions: at the end of the day, living somewhere is going to cost you money. This is where the details matter: how much money for each option? If the total cost of owning (interest/opportunity cost, transaction costs, upkeep, insurance, property taxes) is more than the total cost of renting (rent, tenant’s insurance) for the same place and you invest the difference, you’ll do better renting.

4 Responses to “To Put It Another Way”

  1. Michael James Says:

    This reminds me of coaching baseball where I have 10 ways of saying the same thing, but only one of those ways resonates with a particular kid.

  2. Potato Says:

    That analogy really resonates with me! :)

  3. Netbug Says:

    “and you invest the difference”

    This is the thing that most people don’t get for some reason.

  4. Erick Says:

    Hear hear! And in a few years from now people will realise that due to demographics, you can no longer “build equity” in your house. The psychological damage I expect will be worse than the actual financial damage. I still hear people talk as if there’s some kind of security in owning a house.

    I would rather invest the difference.