Yeah, but you end up owning a valuable piece of property. If owning a dwelling weren't more cost-effective than renting one, landlords would be out of business, wouldn't they?


You make a good point, but it's more complicated than that.

A common mistake that people make is taking the point of view that "...renting instead of buying, you're just throwing your money away." In fact, you are receiving value for that money: You have a roof over your head, shelter, a place to live.

As for cost effectiveness... Let's say you're looking at a $150,000 house with an 8% mortgage for 20 years. 10% down payment.

Rough numbers, you're looking at about $1025 month in payments, with total interest coming to about $108,000 on the $135,000 principal. Let's add another $100 a month for property taxes, and another $100 a month for utilities, and another $100 a month for insurance, and another $75 a month for repair and upkeep (for example, about the time your mortgage is finished, your roof will be too). So, figure $1400 a month you're paying to have a roof over your head and eventual ownership of that roof and everything underneath it.

Chances are you could rent a comparable house or condominium or whatever for about $900 a month, saving you $500 a month.

Take the $15,000 down payment you were going to use to start your mortgage and start an investment account that will return 8% anual interest compounded monthly. Add the extra $500 that you're saving each month by renting instead of paying a mortgage, and what do you have to show for it?

Well, you don't have that "valuable piece of property" that might be worth more, or might be worth less than the $150,000 purchase price. Sometimes real estate values go up, sometimes they go down, and remember, that property is now well used and 20 years old!

I guess all you have to show for your rental is 20 years of shelter, and, darn it, I know there was something else, oh, yes! $370,375.65 that, due to the marvels of compound interrest, is now sitting in your investment account.

Now, there are positive intangibles to buying a home -- pride of ownership, privacy, security, knowing that some landlord can't kick you out on the street, being able to own any pet you want, etc. But, there are also positive intangibles to being a renter, like when the toilet overflows or the furnace quits and it's 10 below zero outside it's the landlord's problem, not yours. Remember the old joke? "Hey, you gonna play golf this weekend, or do you own your own home?"

The choice of renting vs buying is NOT the obvious, no-brainer decision that most people think it is.

tanstaafl.