Renting versus buying

Should I rent or should I buy?

An article to weigh up the pros and cons of long term renting over buying.

Didn't anyone tell you it's bad luck to walk under ladders

As an Englishman I am constantly told to "get on the property ladder" as soon as possible and hounded by family and friends telling me to aim to buy my first property as quickly as possible. It is no coincidence that we have a saying in England, "an Englishman's home is his castle" encouraging the romantic notion of owning ones' own home. Roughly 70% of UK families are home-owners, on the continent in France it is as low as 40% with many Frenchmen preferring to remain long term renters. Are we in any better position by owning houses as opposed to renting?
"your house is not an asset"
Recently a cousin of mine got married. I remember that there was a lot of angst about getting a deposit on a house before 'the big day'. Why such pressure? What would have been so bad about renting together, even for just a few years? It makes no sense that the first thing you do once you get married is to take on a pile of debt. Why do we never question our family and friends when they are advising us to buy? I once asked my grandma: "but why do I need to buy?". Her only response was the old inept mantra: "you have to get on the property ladder". This is not an answer, nor is it even an argument, it is just a misused saying that we are told time and time again.
I would advocate that you keep away from the proverbial property ladder.

What's wrong with buying?

  1. Bad Investment - Many is the time that a person argues that a house is an asset. This makes little sense to me. Let's evaluate this "asset": you had to use all your savings to put the deposit down, you've committed yourself to 25 years of payments, you have leveraged up four times your income and taken on a mountain of DEBT for your "asset", and bought a highly illiquid asset. Since when has anyone agreed it was sensible to taken on debt to buy an asset? In most cases you will eventually pay back roughly double what the house was originally worth when you include interest payments.
  2. Saving money - Many people will argue: "the benefit of the mortgage is that you will eventually own a house, saving you money in retirement/ later in life? Furthermore you could sell it and live off the money in retirement". The false logic of this is that it forgets that you will still need to live in a house. So your house is not an asset since you will not sell it without buying another house. Even if you downsize with a profit, there are still better ways to invest your capital.
  3. Make money - The housing market historically yields a return of 4% per year, whereas shares yield a return of 7%. It is an interesting experiment to see how much more wealthy you would be if you became a long-term renter and invested the excess amount into shares. There is an article that has done this for an american market. Try it yourself, it yields interesting results. Some would argue that those returns aren't guaranteed, however, if you used an index tracker of the FTSE100  or DOW, these are the sorts of returns you could expect to receive over 25 years.
  4. Hidden Costs - There are the obvious costs associated with buying such as the deposit, mortgage principal and interest payments. However there are far more costs to consider that most people forget about. These are property taxes, renovations, maintenance and repair-work, home-owners' insurance, tax on profits from selling, stamp duty. For all these costs, a renters' landlord would pay. This can add up to tens of thousands of pounds over the lifetime of a mortgage.

Some downsides to renting

It's not all cosy for the renter. You have to rely on your landlord to sort things. You need to ask permission to redecorate, or to change any of the structure. You still need to pay some insurance on your possessions (however this is far smaller than home-owners insurance) and still have to pay council taxes.

Living costs - Food for Thought

Never let anyone tell you that renting is "throwing money down the drain". It would be like saying any other good that you hire or rent is like throwing money down the drain as its not bought over the long-term. You're paying for a place to live and this is usually cheaper than mortgage payments. I'm not saying never buy but renting can be cheaper in the long-run, gives you more flexibility to move around (I hope to live in New York for a bit) and is less of a strain on your personal finances.
I hope to buy one day, but only when I can actually afford to pay for the house outright and once I have decided that I actually want to settle in a particular area. In the meantime I enjoy the idea that I have the freedom to move all around the world and to build up my pile of savings. It has even occurred to me that I may never buy a house. Logically there is a quicker way to build wealth with other people's money. So every time you make enough money top put a deposit down you buy an investment property with tenants and you get them to pay for the house, whilst you yourself also remain a renter.

What do you think? Am I missing something? Are there more reasons than I have considered for becoming a buyer, or am I right and I should continue to ignore defunct mantras?

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