Every situation is different. Generally speaking if you're going to stay put for 5 years or more, than owning is generally a better idea than renting. However, there are certain living situations where this is false. Here is a case study of just such a situation...
So let's look at an individual who is not married or doesn't have children. This person has 3 options for this case study: live alone, buy and have roommates, or rent a room from somebody else. Living with his parents isn't an option since that person enjoys sex.
So that person could live alone and pay $900 a month and pay all of their expenses. That person could buy a place and rent out the rooms. In which case they could net out living for $250 a month and share expenses. Not bad right? This same house could be rented as a whole to somebody else for a profit of $531 per month. Or they could rent a room and share expenses for $500 a month. Sounds like a no-brainer...
Now off hand you would think, "Ok $250 is less than $500, so buying a place and renting out rooms is better than renting a room." right? Well all of you are financially superior individuals since you read this website on a daily basis. So what's wrong with this analysis?
Well like I touched on yesterday, opportunity cost is kind of like God. She is everywhere and always in your life constantly keeping track to see if you are maximizing your economic utility. So what's the opportunity cost of living in your own place vs renting our your own place and renting a room? Well as it turns out about $500 a month or $6,000 a year! If for some reason you think you're being slighted, than think again. Your living conditions are exactly the same. Here's the big difference: you can get an extra $1,000 for your entire house vs just paying out an extra $500 for renting a room. All else is equal! Or as they like to say in economics class ceteris paribus. It's latin, google it...
Now you might be thinking that this situation isn't real or that I made up these numbers. That would be false, since they were drawn from zillow.com data in the surrounding neighborhood of where I live.
For many families, and I use families on purpose, it usually makes more sense to buy than to rent. However, all analysis needs to be done on an individual basis. I'm of the firm belief, and I've broken it myself, that everything should rent rooms until they get married. It saves a ton of money and it also teaches you to live with others, thus preparing you for marriage. Every situation is different, every housing market is different, just make sure that you figure in the true opportunity cost of your analysis and not just dollars and cents cost.
So let's look at an individual who is not married or doesn't have children. This person has 3 options for this case study: live alone, buy and have roommates, or rent a room from somebody else. Living with his parents isn't an option since that person enjoys sex.
So that person could live alone and pay $900 a month and pay all of their expenses. That person could buy a place and rent out the rooms. In which case they could net out living for $250 a month and share expenses. Not bad right? This same house could be rented as a whole to somebody else for a profit of $531 per month. Or they could rent a room and share expenses for $500 a month. Sounds like a no-brainer...
Now off hand you would think, "Ok $250 is less than $500, so buying a place and renting out rooms is better than renting a room." right? Well all of you are financially superior individuals since you read this website on a daily basis. So what's wrong with this analysis?
Well like I touched on yesterday, opportunity cost is kind of like God. She is everywhere and always in your life constantly keeping track to see if you are maximizing your economic utility. So what's the opportunity cost of living in your own place vs renting our your own place and renting a room? Well as it turns out about $500 a month or $6,000 a year! If for some reason you think you're being slighted, than think again. Your living conditions are exactly the same. Here's the big difference: you can get an extra $1,000 for your entire house vs just paying out an extra $500 for renting a room. All else is equal! Or as they like to say in economics class ceteris paribus. It's latin, google it...
Now you might be thinking that this situation isn't real or that I made up these numbers. That would be false, since they were drawn from zillow.com data in the surrounding neighborhood of where I live.
For many families, and I use families on purpose, it usually makes more sense to buy than to rent. However, all analysis needs to be done on an individual basis. I'm of the firm belief, and I've broken it myself, that everything should rent rooms until they get married. It saves a ton of money and it also teaches you to live with others, thus preparing you for marriage. Every situation is different, every housing market is different, just make sure that you figure in the true opportunity cost of your analysis and not just dollars and cents cost.
-CC
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