The decision to buy or rent a home is big one, especially if you've never purchased real state before. Here's my story about how I decided on buying a home vs renting. For me, the decision came up one rainy winter. Rain during the winter in San Francisco means lots and lots of snow in Lake Tahoe! My buddies and I decided to take a 2.5 hour drive up to Sugar Bowl and hit the slopes that Saturday. A total of 2 feet of fluffy powder fell overnight and we were in snowboarding heaven!
Fall In Love With A Gem Location
When we returned that evening, our legs were sore but our faces beamed with smiles as we reminisced our daring jumps off of several of the steepest slopes. We had no fear because the landing zone was soft.
The very next day in SF, the sun was beaming down a warm 76 degrees and we decided to play some tennis at the local park. It was that exact moment when I knew that San Francisco was the place I wanted to live for as long as possible. Months later I bought my first place.
Buying A Home Is Not About The Money
Knowing when to buy a home is not so much about one's finances. Everybody knows that you should follow my 30/30/3 home buying guideline.
Helpful Guideline On Buying A Home
This 30/30/3 guideline is:
- You have 30% of the value of the home saved up in cash,
- Spend no more than 30% of your monthly gross income on the mortgage,
- And pay no more than 3X your annual gross salary for a home.
This should be obvious to those of you who know the basics of personal finance. If not, I encourage you to keep reading my articles regularly. The more knowledge you have on personal finance, the better your finances. Check out my top financial products page and sign up for free wealth management while you're at it.
The most important factor in deciding on buying a home is whether you love the environment you are in. You should be able to see yourself living there for years. In addition, you should have already found a career or entrepreneurial endeavor you enjoy.
Ask yourself this main question:
If you were forced to live in your current location for 10 years, would you be happy, OK, or frustrated? If the answer is ‘happy', you have yourself a winner.
Home Buying Is Really That Simple
The key to wealth is simply being in the game for a long enough period of time. Larry accumulated $5.7 million in his 401K because he invested for 35 consecutive years at his firm.
It's the same thing with owning a home. Thanks to inflation, and an ever increasing population, if you buy a house and live there for 20-30 years, you are most certainly going to come out fine. And if nothing else, after 20-30 years, you'll have a nice little asset to call home, where you can live rent free.
Sick Of Renting? Time To Buy
After three years of saving and investing all my money after college, I was sick of renting. I didn't want to spend more than $2,000/month on a nice one bedroom. And the rental stock really is inferior to the ownership stock here in San Francisco. There's no point in making money if one doesn't spend it on things that improve the quality of your life.
I knew very well after that glorious weekend that San Francisco was the place I could see myself living for the rest of my life. Before that I had already lived in five different countries, studied abroad in three others, and visited 23 more up until that point. I just knew I had found myself a winner. Nowhere else has the great combination of comfortable weather, plentiful 6-figure job opportunities, culture, food, nightlife, and great outdoors like San Francisco.
See: BURL: The Real Estate Investing Rule To Follow
Life Is How You Live It
Deciding on buying a home is like deciding on a relationship or a marriage. You just know at that point in time, s/he is the person you want to spend the rest of your life with.
If you are unhappy or uncertain with your career, haven't explored enough places, and still don't know what you want to do in life, renting is an absolutely fantastic choice.
Alternatively, if you do happen to know early on what you want to do for your career and where you want to live, then by all means go for it.
Related: Real Estate Is My Favorite Asset Class To Build Wealth.
I strongly believe everybody should get neutral inflation by at least owning their primary residence. Real estate hedges against inflation and is a great forced savings account.
Wealth Building Recommendations
Before buying a home, make sure you are financially secure. The last thing you want is to get stuck in a mortgage you can't afford. Build your savings, save and invest for retirement, and protect your loved ones with life insurance. You want to make sure your family is financially secure and can pay your mortgage if anything happens to you.
Here are a few more wealth building recommendations you should consider.
Explore real estate crowdsourcing opportunities:
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Shop around for a mortgage:
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Updated for 2020 and beyond.
36 thoughts on “How To Decide Whether To Buy Or Rent A Home”
definitely ability to stay put and desire to change the style / quality of life
I agree if you know where you want to live and buy with your rules it is great to own your own home. We have owned for 5 years and whilst I do not love my house or the area (I would prefer to be about 3 hours away in Canberra, not Sydney, but need to be in Sydney right now) I am glad we bought.
We can do anything we like and our house would sell for about $100,000 more than we paid for it, which is a tidy profit. We plan on selling later this year, renting for a bit then buying where we want to live.
Nice article, and I like the 30% rule. I thought I’d comment that as an entrepreneur, I think of liability as either productive or counterproductive. If I’m using a room in my house as a base of operations for a home business and I’m making more money than my rent payments, then I have positive cash flow (and even get tax benefits). Then it makes sense to rent, because the room is a productive element.
Renting is often viewed as “throwing money away” however, it’s also not great to tie up capital that could be used for more productive investments (or at least ones you can predict the outcome of better). Just my two cents! -Kristoph
Good to hear from you man. I enjoy reading your article on Untemplater.com.
Rent is absolutely fine, especially if one is mobile and has finite capital. If you are an entrepreneur, then by all means use your capital to fund your business!
We’re still deciding whether or not we’re going to keep renting or if we’ll bite the bullet and buy a house. Honestly, we’re not too concerned about owning a house until we’re ready to grow our family with a child. That’s when we’ll know that we’re ready to be in one place for a long period of time. Since we’re still young, renting is more ideal in case we want to go somewhere else.
Yep, if you are unsure whether or not you want to stay in one place for 5+ years, by all means rent!
Welcome to at least stop by and visit!
I agree, I think buying a home is primarily a place to live. But because it can also be an investment, something you benefit from financially, that should be taken into account. Of course, if you do not care about its impact on your finances, then by all means, only think of it as a place to live. But it is not financially savvy to ignore the bottom line impact of real estate.
Here in London price, size, schools, neighbourhood, crime and proximity to transport networks are key in the decision. For a city where affluent neighbourhoods and, let’s say, more troublesome neighbourhoods lie directly next to each other, finding a house that is at once accessible and reasonably priced can be incredibly difficult. Your 30/30/3 hypothesis is also very interesting.
Wow this is the title of my new eBook! I love your thoughts and insights. All I wanted to add is that we all have a unique situation. Just because interest rates are low or because “experts” suggest that you buy a home, it doesn’t mean that it’s the right time for you.
Is my post title really the title of your new ebook? You might want to jazz it up a bit if so!
I’m helping my mom decide if she should sell her house, move into a smaller place and rent or just keep her house during retirement. Her house is way too big for her and it’s a lot of upkeep but I can’t see her living in an apartment. Hopefully we can find a way for her to keep her house. I need to check when she last did the big projects like replace the roof, water heater, ac, etc.
With labor now being more mobile than ever I’m starting to think that it makes sense to rent until you’ve come to a point at which you’re thinking about retirement. It is at that time that you can be the most sure you’re going to stay in the same place.
I live in an area that doesn’t have a very big divide in quality of rental homes and owned homes, so I didn’t really take that into consideration. I can see where this could be a very big deal, especially in areas with higher population density. For families, school districts would be important, too.
Good article. A house is a home first and an investment second. Far too many people are still buying a house thinking that they are going to build a ton of equity in a few years and get rich. It only worked that way in the early 2000’s, which was an anomaly.
My husband and I started looking into buying a house a couple of years ago. However, I’m glad that we weren’t ready financially; I’m not so sure I want to live where we currently live for another 10 years. We’re now exploring other possibilities north of us (but not as far as SF!) I’m tired of the traffic congestion and really want a more walkable, yet less crowded city. Of course, it will also depend on which districts will be hiring teachers within the next year. I’m glad that right now I’m flexible and mobile!
If I am going to live in an area for at least 5 years, I would buy a home. I would take a slightly different approach to your 30/30/3 though. Southern California housing is pretty expensive, however waiting to accumulate a 30% down payment may take too long. 20% is okay with me, but I would use 25% of monthly gross for the payment. 3 times salary in southern California would not get very much. I think you must be flexible with each factor, but adjust on the conservative side. My current home was purchased in 1997, for 2 times our salary at the time, but with 100% financing. The payment was less than renting equivalent space. Part of my 100% financing was my line of credit for the (20%) down payment. It was paid back in less than a year. I did not want to withdraw the cash.
Your timing of 1997 is lucky. I really don’t care where anybody lives… they should still do their best to stick to 30/30/3. That’s how people got in trouble, especially in southern California!
I feel your guideline rule about 30/30/3 when buying a home is a very important piece of the puzzle when considering either the purchase or rental of a home. Like many have said earlier, the ability to stay long term in the house is of great importance to many folks, especially those who are beginning to start a family. While the thought of purchasing a home may seem unreasonable for many people, I believe the important part is to carefully plan and budget according to your income. The 30/30/3 rule provides a great way to build up a savings while comparing houses on the market, as well as a standard guide towards paying for the home over time down the road.
Taxes is the other very important piece of the puzzle. If you are in the 35% tax bracket, and pay 10% state taxes, it behooves you to buy as well.
I still rent my home, and am working on getting my finances in order so that I can buy in the future. I’m glad that I rent at this point as well, as I was being pushed to buy after I graduated and resisted – soon after, the job I had lined up fell through, and I felt crappy enough with year lease hanging around my neck – I’m glad it wasn’t a 30 year note. I think the ability to stay in the same place is key. The reason that I’d like to buy were I am right now are family near by (but not too close), I’ve got a stable job, a great lifestyle, and friends and neighbors I enjoy being around. This area isn’t perfect, but then again if you’re looking for perfection you’re going to keep looking and not enjoy what you’ve got.
Good you didn’t buy right after college too. SO FEW recent grads know what they want to do immediately for 5-10 years. I would say less than 10% stay in the area for longer than 5 years. I wouldn’t get boggled down with a property for at least 3-4 years out of college if you can afford it!
Our current home wasn’t a very good financial decision, but we love it here. We live in the city and there are so many things to do and the location is very convenient. Portland is right for us and we don’t mind investing in it. We’ll live here as long as we can afford it. ;)
I’ll have to visit you one day in Portland! Why are you at that World Domination Summit or something?
Portland is such good value compared to the Bay ARea, it’s awesome! What are your state and sales taxes btw?
Yeah, let me know if you’re in town. I’ll take you on a few good pubs.
No sales tax! State income tax is 5-11%. It’s 9% for most people.
The New York Times had a great interactive piece about buying or renting a home https://www.nytimes.com/interactive/business/buy-rent-calculator.html, it’s fun to play around with too. As for the question posed, I’m still too young to have made up my mind, so renting is where I’m at (though I see NYC as my home for life). But aside from the finances of buying a home, I see a home as a very emotional purchase. And while your finances dictate what kind of home you buy or rent, deciding everything else is purely emotional.
That’s why once you get the 30/30/3 rule down pat, finances don’t really matter b/c you are safe. You have to make that mental and emotional commitment. Once you do, I promise you it is one of the best feelings ever. It’s like plating an American flag in the ground and claiming it’s yours!
When we bought our first home back in 1993, we strictly viewed renting as ‘throwing money away’. Housing prices had only gone up in my short time being an adult, and a house seemed almost like a guaranteed investment to people at our stage of life (and experience).
I don’t love where I live by any means. We are stuck here because of family commitments. So, we make the best of it.
Now that I am older, I don’t view a house as an investment anymore. However, I am glad we bought a house as opposed to renting the past 18 years.
A house is a home. IF it makes money, fine. If not, fine. A home is a house is a home! There is something priceless of claiming a property for your own.
18 years later.. if you had rented, what would you have to show for it? I encourage people to buy once they have the 30/30/3 guide down, and know they plan to live in one area for 5-10+ years.
I’ve lived in PA just about my whole life and plan on living here forever. But this year I had to go to San Jose twice for work and that is the one place I could see myself moving to and being just as happy. I describe that whole area, to people who haven’t been there, as a paradise! If something at work ever opened up out there and I could transfer, I would in a heartbeat. I envy you.
Wow, a paradise huh?! It’s funny, because folks who live out here continue to look westward, to the paradise of Hawaii or Bora Bora! Everything is relative.
What we do know is that most of us would never subject ourselves to the inclimate weather of the east coast. It’s just too rough and we’ve become soft.
The job market really is booming here though, and therefore property prices have held up.
The ability to stay is huge; during boom times, nobody cared because you were making 10% a year on home value on a 0% down investment and companies were giving out relo packages. Those days are over. If you’re 95% sure you won’t have to move in the next 20 years, it probably makes sense to own over rent. If you’re just outta college and likely to move for better work every 5-10 years, you may want to rent early on until you figure it out. The transaction fees are staggering and the days of capital appreciation are virtually over. We’re in a double dip now.
I highly doubt we are in a double dip. With LinkedIn, Facebook, Twitter, Zynga all going public and with Apple doing very well, there is so much money out here chasing so few properties it’s ridiculous.
Real estate is local, and I’m focused on the Bay Area. Is it that bad where you are?
In the US at large… major double dip. Case-Schiller index confirms that. With this social networking/Bay area bubble, it will just crash harder a few years out. Hold on to your hat! You don’t think you’re in a growing bubble?
Definitely a possibility, but there is real earnings this time around. So let’s say things collapse by 50% in two years, half of $100 billion in market cap value is still $50 billion more that wasn’t there in the first place. And if all of can cash out and sell to you guys not in the bay Area and buy real assets like property, we’re golden.
It’s all relative.
Well, the ability to stay in one place is definitely a major source of real estate wealth building as is investing. I plan to do the same thing. We moved around quite a bit early on while still in school but built a house in 1995. We outgrew it with child number 6 in 2000 but have lived here since then. I plan on staying at least another 9 or 10 years minimum until all of the kids are moved out. My parents have only lived in 3 houses during my entire lifetime, the majority of which was the one I grew up in. They built it for $30,000 in 1973 and sold it about 5 years ago because my dad couldn’t take the stairs anymore.
Child number 6! WOW man! You guys be getting busay! :)
Perhaps you can share your thoughts about family and kids. I would LOVE to hear your perspective! thx