Buying vs Renting: 3 Simple Rules of Thumb (1)

By Leonard Baron MBA, CPA, San Diego State University Lecturer | June 27, 2011

Real estate has gone through a few tough years, and many who are considering buying vs. renting are asking themselves, “Is now the time to rent or buy a house?”

Realtors and the National Association of Realtors are telling us that today’s buying environment is the best it’s been in years, maybe in a lifetime. Low prices plus cheap financing equal opportunity! As an independent and neutral analyst on the subject, I can tell you that I fully agree that this can a great time to buy property.

Now that doesn’t mean any property, nor is it a great time to buy property for everyone. Add to that to the difficulty of obtaining financing, and you’ve got some significant issues to think through before deciding between renting or buying.

The most important aspects of real estate are being a long-term owner and buying what I call the “right” property for you.  So without further delay, here are the 3 Buying vs Renting Rules of Thumb that will help you put these into action, and, in turn, help increase the chances that your choice between buying and renting will be the right one.

RULE OF THUMB 1:  Avoid Short Term Property Ownership

First and foremost, we buy property with the hope that we will be financially better off down that road than if we remained a renter of someone else’s property. For the vast majority of purchasers, the reality is that if you are not going to own property for at least five years, you will probably be financially better off—and have a much lower level of stress—by paying rent to someone else.

The reason is that there are significant transaction costs on the buy and the sell that will probably wipe out any potential equity you may have hoped to earn on short-term ownership. In addition, you often pay more to own than to rent, so all that additional money could have been saved and invested elsewhere.  Owning real estate is also expensive, stressful, and time consuming, especially if you have to put thousands of dollars into a property you plan to sell in the next few years.

So the number one buying vs. renting tip is – buy property for the long haul. If you’re in the military, a professional athlete, or just don’t know what your future holds: make life simpler and stay a renter.

RULE OF THUMB 2:  It Makes Sense to Take the Time to Buy the RIGHT Property

If you’re committed to buying and holding the property, you must make sure the property you buy is the right one for you, and for all the right reasons.

Reasons such as school district, size, location, and property condition may all come into play. Then don’t forget (or underestimate) the cost to get property into the condition you would like it to be in. Don’t rush to buy a property that you don’t love. Take your time, this is the largest purchase you’ll ever make, and it has significant financial risks.  Take the time to do the hard work up front, the first time around.

How do you do that? Figure out the most important features you want in a home and write them down. Talk to friends and family to prepare that list.  They may come up with some ideas you might not have considered. Realize you will never find the “perfect” property, but by putting some work and thought into it, you will find something that matches your price range and desires, and that you can be proud to call home.

RULE OF THUMB 3:  Be Aware of the Rent vs. Own Differential

Finally, before you purchase, make sure it isn’t too much more expensive to own the property than it would have been to rent it.

Now, fancier properties are usually much more expensive, and if you can afford it, and love it, go for it. But for the rest of us, it makes sense to ensure that our hard earned dollars are well spent. So if you want to buy a fancy condo and you need to put down $50,000 to buy it, and it costs $3,800 per month to own, yet only $2,300 to rent, that’s an extra $18,000 per year for the ownership privilege, plus your down payment. So make sure that makes sense to you.

Only you can make that decision about whether to buy or rent a house. But those items above are the biggest mistakes I’ve seen people make: short term ownership, buying just to buy something, or buying where they can rent at a much lower cost.

So think those through as you consider your buying vs. renting housing options for the next few years, and realize it is a great time to buy real estate – but only for the right purchaser and for the right reasons!

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Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 - A Smarter Way to Buy Real Estate.

You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com - under Chapter 1 – Due Diligence (no sign up or registration needed just download it!)

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