Should I buy or rent a house?

Should I buy or rent a house?

As a young professional, you’ve probably been saving all your coins and shaking your piggy bank, anxiously awaiting the day you save just enough money to finally move out on your own. Or perhaps you’ve been working for a while and saved quite a nice chunk of cash -the next logical thing is to invest in owning a house? Or maybe you’ve been renting for a while and you feel like all your hard-earned money is just going into someone else’s pocket, why not make it your own?

Renting versus owning a home is truly a pull and tug topic. It’s something everyone considers at some point in their financial journey but perhaps it’s not a decision that everyone weighs evenly. Most people aspire to build/own their homes because home ownership carries a financial prestige that renting simply doesn’t.


Let’s be honest for a second. Socially-speaking, saying “I’m a proud homeowner” sounds a lot better than saying “I’m a lifelong renter”.


Maybe this peer pressure is what’s stopping people from equally considering the implications of ownership versus renting? 


Let’s find out by weighing some of the options!


BUYING


Owning a house is truly an amazing achievement. Whether you’re building from the ground-up or you’re paying a mortgage, organising your funds and simply starting is clap-worthy! People choose to own homes over renting for a variety of reasons, so let’s explore some of those different perspectives.


From a financial prestige perspective: Major financial decisions in Ownership vs. Renting


The allure in owning or building a house lies in the proprietorship. This basically means you get to call the shots on everything. Thinking of getting that open-space kitchen layout you saw on Pinterest? Done! Thinking of painting the walls green in one room and beige in the other? Done! Thinking of breaking down the living room wall and putting in french windows? Done! 


You are the Captain of this ship!


I know you’re excited but easy there, Captain. 


Remember, as the Captain, you also have great responsibility. Owning or building a house is not as glamorous as it sounds. In fact, most people don’t consider all the decisions that are made prior to owning or building a house. 


Specifically, if you’re building a house, one has to make multiple decisions prior, such as the location of the house, the fixtures and finishings of the house. Some may even argue that because of this, building a house is a subpar financial decision because the majority of the things you buy are because you like them. Indeed, building a house is more nuanced but, it’s important to remember that likeability plays a big part in what you buy. However, with renting, majority of those major decisions have already been made prior, with cost-efficiency playing a bigger factor than likeability. 


From a maintenance perspective: Ownership customisation benefits vs. maintenance costs


Ah, the ‘M’ word again. 


As we’ve already noted, building/owning a house gives you free rein on customising your space exactly the way you want it to look. However, with large purchases comes large maintenance costs. In the same way cars demand constant maintenance over time, houses do too. Unlike rented homes, maintenance responsibilities fall completely on the hands of the homeowner. 


As a renter, your landlord takes care of all your maintenance at his expense. As a homeowner, if the toilet floods or the wiring trips up, you can’t call your landlord to get it fixed. 


You are the landlord.


In fact, what a lot of people don’t realise is, if you buy a home and own it for about 25 years, over the course of that time, you will probably need to replace everything in the house at some point in time. If you tally up all of the maintenance costs for that period of time, you may find that you’re spending just as much, if not more than the original cost of the house on maintenance alone. 


That’s kind of like paying for two mortgages. 


Worth it? You decide.


From an ROI perspective: Sentimental ROI’s vs. Financial ROI’s


Depending on your culture, owned houses are designed to be passed down. Most people buy homes with the intention of leaving it to their kids or next of kin once they’ve passed on. While this offers great sentimental returns for your family, does it offer similar, if not more financial returns for you? 


For most people, buying or building a house will probably be the biggest financial undertaking they will commit to in their life. However, it offers little-to-no financial returns in the long-run. 


Speaking of the long-run, how can we forget about insurance costs? Crucial to remember that over time, your house will appreciate in value, which means that insurance costs on your home will also increase. While an appreciation of value in assets is music to our ears, an increase in insurance costs -not so much. 


Tax plays a part in the home ownership journey. Depending on the country you live in, choosing to own your home may change the way you pay tax. In some countries, this works in the form of tax deductions and credits, which is a bonus but a limited one in the grand scheme of things. 


So, you really have to ask yourself, are the sentimental returns of investing in home ownership really worth the limited financial returns?


RENTING


From a freedom perspective: Freedom to explore vs. being tied down


A lot of people feel renting comes with a huge lack of security. 


Basically, with renting the only thing stopping you from being homeless (albeit, temporarily) is your landlord and his plans for the space. Also, renting doesn’t quite carry the same financial prestige as home ownership. Majority of people assume that if you’re renting, you're working towards eventually owning or building a home.


But why can’t renting be a financially aspirational decision?


As a young professional with lots to see and lots to give, the world is truly your oyster. If you buy a house or decide to build, you’re immediately tied to wherever that house is for the unforeseeable future. That is unless you're swimming in cash and can afford to own and live in multiple homes across the world - Congratulations! 


Unfortunately, for the rest of us paupers, that’s not the case. In fact, buying or owning a home makes travelling, working or living anywhere else an extremely complex and highly unlikely decision. Whereas with renting, you and your passport have free rein!


What’s important to you? Freedom to explore and live around the world or owning and living in your first property?


From a breaking even perspective: Mortgage vs. rent


If you’re taking out a mortgage on your home, it turns out that it typically takes about 15 to 30 years to eventually fully own your home. 


What that means is, on average most people finish paying off their homes after about 15 -30 years. So, in order for you to break-even (start owning your house at a higher percentage than the bank does), it might take a while.


To put it in perspective, by the time you finish paying off your home, you could have also raised either a young teenager or a young to middle-aged adult.


Is this any different from long-term renting?


From a finance perspective


Let’s talk from a purely numbers perspective.


Say you put aside about KES. 20 million {$200,000 USD } in a fixed deposit account towards buying/building a house and each year you gain about 10% interest on that amount. This means you’re earning an interest of about KES. 2 million {$20,000 USD} per year.


If we divide that interest across the twelve months of the year, we’ve got about KES. 140,000 {$1400 USD} a month of loose income. When we look at renting rates across a city like Nairobi, with this amount you can afford to rent almost anywhere in the city!


Let’s take things a step further.


As of March 2020, according to statista the average monthly rent for a one bedroom apartment in Nairobi is KES. 43,000, {$430 USD}. After a year of renting this apartment you will have spent {$5160 USD} in rent.  If you keep renting this apartment for the next couple of years, it will take you approximately 38 years (instead of 30) to  spend the KES. 20 million {$200,000 USD }, which is the money you initially put aside to buy a house.


Of course, this is a very rough example but the aim is to give you a peek into the financial elements of either buying a house or renting long-term.


Now that we’ve weighed the options, what do you think?

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