3 Things I Don’t Agree With The Eternal “Buy Or Rent” Debate
Debate #3: Real estate appreciation benefits landlords while increasing rents!
This is a controversial topic and there are many paradoxes.
With this controversial writing, I venture into one of the most controversial issues in terms of personal finance.
Between those people who are committed to acquiring a property as soon as possible, and those who believe that in our times it is advisable to live all your life without ever owning your own home.
This eternal debate is broad and full of interesting questions and paradoxes.
Since I am still a young 20-something, I ask myself the following question: do I take out a loan as soon as possible to have a “house” or “rent” before I know where I am going to settle down?
Eternal Debate: Buy or Rent?
In my last article on real estate, I participated in the conversation that went on in the comments and was well served:
“If you rent, you enrich the landlord. Your rents could finance your own home for when you retire.” Seems logical, instead of going to the owner, the money would go to the bank.
“The rent goes up forever. The mortgage payment is fixed and then it’s gone. Unstoppable logic.
“The real estate market will appreciate. If you own a property, you make a lot of money. If you are a tenant, you don’t benefit from it and your rent will increase anyway!” It sounds more like a 3-on-3 tournament and only one comes out the winner. The “Owner” team comes out victorious by technical knockout, of course!
Only here, these conversations full of common sense seemed too simple to me to dictate a major financial decision. So here are each of these three “pieces of advice” analyzed from a real perspective.
Debate #1: Renting Is Throwing Money Away, Buying Little by Little Is Owning
Indeed, you will slowly become the owner of the house whose loan you are paying off, but the story is much more complicated than that, and a person who chooses to rent today may end up owning it at a lower cost than you!
The structure of your monthly loan payments (and specifically the interest ) puts into perspective the correctness of this advice: the higher the interest, the more you will enrich the bank and drain your accounts….
Debate #2: Rents Never Stop, Monthly Loan Payments Stop
True, but dangerously seductive!
The time over which your payments are spread out is only one of many factors. The real question arises by comparing the possible monthly loan payment with the rent you will pay by renting.
An example proving that this factor is insignificant: all things being equal, would you rather rent with a $400 rent for 60 years or pay an uninsured monthly payment of $800 for 30 years?
Whichever your answer, it is correct because it follows your personal preference and not the wisdom of numbers. You guessed it, the two scenarios give the same result, that is, a sum of $288,000 spent in total!
Of course, we know that:
The probability of finding a lifetime income of $400 in the capital is quite an achievement (let me know if you do),
You can go into debt to purchase after 10–15 years of renting
We must take into account the opportunity cost of repaying a loan rather than investing in the stock market,
We should not forget the issue of no income, etc.
The goal is simple: to go over hasty generalizations. And now we know that the payment term is only one of many factors to be considered when deciding to buy or rent.
Debate #3: Property Valuation Benefits Homeowners While Raising Rents!
Let’s get right to the point: Yes, real estate generally appreciates year after year, and yes, your rent will certainly increase based on the rent reference. However, there too you have to do a little digging to get the final word of the story.
Let’s start with the first part of the myth: “Real estate appreciation benefits landlords”.
First, a reminder about the definition of inflation: Inflation is the loss of the purchasing power of money that results in a general and lasting increase in prices.
Inflation, therefore, indicates, on average, how much prices have increased over a year. If your income grows faster than inflation, you gain purchasing power. Otherwise, you lose purchasing power.
With this detail in mind, let’s look at the 3 possible scenarios:
Appreciation rate of your property > Inflation rate: Yes, you gain real value!
Appreciation rate of your property < Inflation rate: Actually, you lose out on the exchange rate…
Appreciation rate of your property = Inflation rate: Your real value remains fixed
As usual, always put it in perspective!
Let’s get to the second point: “While she raises rents!”
There really isn’t much debate that rents generally go up. However, they must be put in perspective with inflation. If rent increases at a slower rate than inflation, we will pay less for our homes. This assumption assumes that your salary also increases at least as much as inflation.
To Bottom Line
So, buy or rent? The question will always arise, but hopefully, you can now overcome the false evidence that some advice hides.
Good luck with your research. If you’ve ever wondered, let me know your findings on Twitter. Your opinion interests me greatly, especially since we rarely agree on this question.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.