Rent or Buy: Which is Better?

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rent or buy

 

Have you asked any of your family members or friends what they think of renting instead of buying your own house?

What are their opinions?

Let me take a stab at it.

I guess they told you that renting is a terrible idea. That you should buy your own place instead of perpetually paying rent for who knows how long.

Renting? It’s a waste of money. You are paying monthly dues for years yet nothing goes back to you. At the end of the day, you still do not have a house you can call your own.

These, we imagine, are the classic answers to whether we should rent or buy. Renting does not make sense. Buying is the way to go.

Well, who’s to blame? It is almost a common knowledge passed on to everyone, without asking the reasons behind the unanimous decision that buying a house is greater than renting. The result is that sometimes, it makes renters feel ashamed that they don’t own the roof above their head.

Well, we will not take the usual route here and say yes renting does not make sense.
Actually, it does make sense. As with all matters of personal finance, it simply depends on your situation and your own decision.

The reason why a lot of people say renting does not make sense it that it does not build you equity. It means you are paying every month, but none of those payments become part of your assets. When you buy a house and pay the mortgages, part of that mortgage is paid against your principal and therefore goes to your equity…or, in other words, your ownership of the house. When you still have zero equity, the financing bank owns your house. When you start having some equity, both you and your financing bank are now part owners of the house. You pay your mortgages for 20 or 30 years until you finally own your home 100 percent.

When you rent, none of these transactions take place. You simply pay your landlord and poof, money is gone.

But that should not be the end of the story for renters. Generally, rent is cheaper than mortgages (dollar for dollar comparison, including taxes, interests and maintenance) . Now, what does this imply?

Simple. You still have money left for other expenses! But forget about expenses. Renters should invest in high-performing assets such as stocks, also known as equity markets. A house investment is generally a weak-performing asset because home values historically grow with inflation.

Here’s another great thing about renting: you are not tied to your mortgages for decades. If you are renting and young enough to explore possibilities, you are free to move from one place to another, to seek greener pastures, or even start your own entrepreneurial adventure.

Lesson? You cannot eat your cake and have it, too. If you decide to spend on something, that money has to go. You can’t use the same money to spend on something else. The same is true when buying a house, which is not cheap, by the way.

It’s all a matter of priorities.

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