Buying vs renting

Often the rhetoric around “buy or rent” centers around housing with each side overemphasizing one factor or another to justify their claim, but financially speaking renting is almost always better. Here are different ways to look at renting.

The case for owning a home is that if you have to live somewhere, you might as well live in your own place instead of “throwing away rent to the landlord,” but it ignores that the true cost of home ownership is generally 25% higher than just the mortgage and that the returns on housing are on average only 1-2% per year. Considering the 5-10 times leverage from the down payment, that’s only comparable to stock market returns of about 10%, but you’re now invested in one asset instead of a broader portfolio. In addition to the discount from not needing to maintain the house, renting also allows more flexibility in case of career moves.

For expenses that you don’t need everyday it is even worst to own. For example, a car, the second largest expense in a person’s life is heavily underutilized. You may commute and use it every day for errands, but the vast majority of the time it is parked somewhere. Unfortunately, car rentals and leases factor in all the costs of idle parking, so the price reflects that of ownership. However, with the emergence of the shared economy, we are seeing the decoupling of car-ownership costs and car-renting costs. Each ride you request is a short term rental of sorts. If that ride is shared or pooled, then the cost of “renting” the service is cheaper than the average car ownership cost of $1/mile.

For items that you use even less frequently, like clothes for women who don’t want to wear the same outfit more than once, then it makes even less sense to buy for a one time use. In these cases, services like clothes sharing or monthly clothes deliveries is the ultimate way to rent new clothes regularly.

Of course there are many cases where it makes sense to own. Even a house can be worthwhile if you are able to rent it out to recover some of the costs. For daily items like computers and phones, it generally makes more sense to buy because renting is usually more expensive or it’s not even possible to rent. The general rule is to look at cost in terms of cost-per-unit of use (day living, mile driven, times worn, etc).

 

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