Rent vs. Buy

There’s a new emphasis on renting these days, and it’s a good thing.

Renting requires you to suffer the scorn of real-estate agents and home-flipping friends, but for many it’s a better decision. Never mind that it would have saved millions from foreclosure and financial stress in California and Florida. For some in their stage of life renting almost always makes sense.

The reason is that buying and selling a home is expensive. Total costs, including brokerage, closing, and moving are usually more than 5% and often exceed 10%. Could the internet can reduce this? Not really. Housing is illiquid. There’s no way to avoid the legal expense and the effort it takes to show and shop for a house. If you don’t think you’ll stay put more than five to ten years, those fees can wipe out a lot of savings.

Owning is ideal when you plan to live in a location for ten years or more and when the price of a house is reasonable. One way of testing this is to ask if the listing price is less than 20 times the annual cost of renting something comparable. It’s not foolproof, but it often works.

Who should rent? Students and young people likely to move as they build their careers, and older folks who may want to relocate to be near family. This isn’t just common sense; it also makes good financial sense. One thing is certain: renting ought to get more respect.

Douglas R. Tengdin, CFA
Chief Investment Officer
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