To Rent or To Buy?

The decision whether to rent or buy a house depends heavily on your circumstances. It is a big decision, and one that we often get horribly wrong…

The purchase of a home is often the largest financial decision that we undertake in our lifetime. Yet many of us blindly tackle it without considering the key factors affecting the decision. Aside from the ability to save for a deposit and negotiating a low interest rate, it is also important to consider:

1. How long to you plan to stay in the house?

As a general rule it is often better to rent if you are planning to stay in the location for less than 5 years. There are often significant costs in the purchase and sale of a house. These include property tax/stamp duty, legal fees, surveyor’s fees and estate agent fees. Spread across 30 years of home ownership these costs become manageable, but over short or medium time frames they amount to a significant expense per year of ownership.

2. How much does it cost to rent instead of buying?

A price to rent ratio can often be used to assess the relative cost of renting instead of buying in a particular location, where:

Price to Rent Ratio = Average house price/Average yearly rent

Rent ratios can vary significantly depending on the region or city you’re looking to live in, but a price to rent ratio below 15 often indicates that it may be better to buy than rent.  Conversely a ratio in excess of 20 may indicate that it is better to rent. Between 15 and 20 the correct decision is less clear.

3. What will you do with the difference?

Often renting will incur a smaller monthly expense than buying. If you are a disciplined investor, investing the excess (and indeed the house deposit which you did not spend), can help you build a significant portfolio of investment assets. For example, investing the 20% deposit on a £250,000 house would yield a £287,175 investment portfolio in 30 years (assuming 6% annual returns).

4. How long will your commute be?

Length of commute is normally something we would consider when purchasing a house or starting a new job, but the impact of commuting is often underestimated. Consider a 25 mile, 45 minute commute by car (which would be considered better than average in many cities). By commuting 45 minutes each way for 5 days you are actually adding an extra day of work a week!

At 25 miles each way and assuming 48 weeks of work per year you are driving 16,800 miles per year. Using the AA’s Motoring Costs 2014 and assuming a car value of £15,500, this would amount to approximately £6,700 per year in expenses…just for getting to and from work. Are you sure it wouldn’t be worth renting closer to work instead?

5. Property rates, taxes, insurance and maintenance

Often when evaluating buy versus rent we look too closely at the monthly mortgage payment versus the monthly rent for the property. There are, however, a number of additional expenses that homeowners have to pay that renters may not. These include property rates, taxes, property insurance and maintenance costs. Roof starting to leak?  Better hope you are don’t own the property and are renting instead…

Final Thoughts on whether to rent or buy

The above are major factors that should be considered, but it is by no means an exhaustive list. Your individual circumstances and geographic nuances should be carefully considered.  Regardless of whether you decide to rent or buy, it is worth taking the time to crunch the numbers. It is a major financial decision, and not one that should be taken lightly. Good luck!