Wednesday, March 7, 2007

buying vs renting

i had a conversation with a buddy of mine yesterday about saving . . . he asked me what i thought my savings rate was and i said, it probably varies between 30% and 50%, but what i didn't take into account was home equity. every month a good portion of my take home goes toward paying on my mortgage, and while it is technically not the same as saving, it is going toward an asset that i could convert to cash at some point. not only that, it is probably earning 'interest' in the form of appreciation.

you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).

look, i'm not saying one is better than the other, but for me, it's the way to go.


Moneyball said...

A majority of the time I find myself in agreement with your "musings". However, a house/condo/other is NOT an asset. It's a liability. I'm going to assume you know the actual definition based on your apparent financial soundness. Now I don't know about you, but my condo doesn't make me money or put money under a mattress for that rainy day. values don't always go up, as we are now seeing nation wide. So in essence, your house/condo/other cannot be considered a savings account and I consider that very poor advice. Obviously, everyone is different, but for the average individual, a roth IRA, or 401k, plus a high yield savgings account SHOULD suffice for retirement.

aggressive saver said...

moneyball, thanks for the comment. i certainly appreciate your sentiment -- my home is certainly not generating any income for me and i am not counting on it appreciating so that i can cash out.

while i agree that a mortgage is obviously not the same thing as a savings account, and with the current state of the housing market across the nation, there is certainly risk associated with buying, my bottom line is this -- you have to live somewhere and if you are renting, you are not building any equity at all. if you are buying your home, however, unless you have one of those nonsensical negative amortization loan you'll be building some equity, you'll have some interest and taxes that you can deduct, and if rents are anywhere comparable, you'll likely be better off buying. those might be big ifs for some people, but for me it's worth it.