Rent vs. Own

The age-old question: buy or rent?  I have admittedly changed my opinion on this matter over the years and am currently of the mind that it really depends on your situation and your goals and can see the benefits of both.  As I began my real estate investing career, I was 100% of the mind that it is always better to own your home than to rent it.  My thinking was that since you're using the four levers of real estate, unless you're living in an expensive market, you really can't beat owning despite the down payment requirements. 

I've always loved the saying, "you don't know what you don't know," and I find it to be very appropriate for this.  I'm speaking specifically about the fact that I had no clue that you could own a piece of a multifamily property for as little as $100,000.  So, let's take a decent 12% average annual return on our apartment investment and apply it to our hypothetical $100,000 investment for a hold period of 5 years.  Total return: $60,000.  

When I consider the return on the first property I bought, something interesting happens that I wouldn't have expected: it doesn't get me that excited.  That's even including the fact that I rented it out for 3 of the 5 years that I owned it.  When you add in the down payment, interest and principal payments that I personally made when I lived there (not the tenants), and some capital expenditures, it comes out to about $135,000 of cash that I personally put into the property.  After accounting for expenses of selling the property, the total cash I received from the sale was about $135,000.  Add in the cash flow I received from the 3 years of owning it of about $15,000 and we arrive at $150,000 for a total return of...$20,000.  But then, we have to add in the 3 years of living expenses when I didn't live at the property.  I actually bought another place to live in, but for the sake of this comparison, let's just assume I rented at $1,500 per month for 3 years.  This would have cost about $54,000, which wipes out our $20,000 return, and we would have spent $34,000 over 5 years in living expense.

Now when looking at the apartment scenario, we have to add those two extra years of rent.  Assuming we found the same apartment for $1,500 per month, we arrive at $90,000, which would have wiped out your $60,000 return from the apartment.  In the end you would have spent $30,000, or $6,000 per year in living expenses, which of course isn't bad at all.

The two scenarios actually come out pretty close to each other.  One big caveat that I didn't mention in the owning scenario was that at the time I sold my property, I was a licensed real estate agent, so I was able to represent myself in the transaction and saved about $10,000 in commissions.  If I weren’t licensed, that would have been another $10,000 off the sale proceeds, which brings the total difference between the two to about $14,000.

The point of all this is to illustrate that it isn't as cut and dry as mortgage payment vs. rent payment and picking the lower one.  There are a dozen other factors that can make one better than the other, and this a real-life example of how it can play out.  Other factors might include lifestyle, whether you're ok with moving around a bit, ability to pay for unexpected expenses in the owning scenario, and many others. 

I think the single most important factor when choosing between the two is whether or not you have something better to invest that down payment in.  At the time, I didn't, so I still believe that was the right choice for me.  Now that I have more opportunities available to me and more ways to earn a return on my capital, I'm starting to reconsider whether having all the equity in my primary residence is such a good thing. 

If you would otherwise spend that hard earned capital on a car, or anything else that doesn't earn you a return, owning your house may be a way to force you to save, build equity, and learn more about the power of real estate.  But by all means, I suggest learning about your options first before deciding.  I explain some basic options in my free guide, so that would be a good place to start!