If you lustfully dream about getting out of the rental game—to have creative control over your space or just to stop "throwing away money" every month—you've no doubt given some thought to whether it's cheaper to rent or to buy where you live. It's easy enough to search out a couple of listings on Zillow to give yourself a quick answer, but the truth is there are lots of unexpected financial effects to weigh—on both sides.
You see, homeownership comes with lots of added costs, like interest and property taxes, that aren't building any equity in your home (I wrote more about what's really in a mortgage right here). And renting, while it might not seem like it if you dream of the homeowner life one day, actually has a ton of benefits to your bottom line. Namely, your money is liquid, and you can put it to work for you.
That's just the tip of the iceberg, really. There is a lot to consider when you're comparing renting versus buying. Enough to make your head spin if you try to Google your way through it. A better idea is to talk to a financial planner who can spell the pros and cons on each side out for you. And in lieu of a financial planner, I'd highly recommend spending 45 minutes with your phone.
One of my favorite free learning resources, Khan Academy, has a series of four informational videos that walk through the topic of renting versus buying a home. The videos are a bit old, and I found the figures they presented a little out of touch today (Khan presents the idea that you have $100,000 sitting in savings, and could get a 2 percent return on it), but the care and simplicity that goes into explaining these really difficult concepts is well worth your time. The math checks out, so to speak, and you'll feel empowered to do the legwork to decide for yourself whether buying a home is a financially savvy move.
Renting versus buying a home, 11:38
Sal Khan presents two cases, one as a renter and one as a buyer, to examine how much money is truly being earned, lost and "thrown away" in each case.
Khan does the rent vs. buy exercise again with different numbers, this time really hammering down on which path burns more money per year.
In this video, Khan does some longer-term thinking and calculations to consider rising rents and appreciating or depreciating home values.
The first three videos rely on back-of-the-envelope math to explain how to make the decision, but in this video, Khan does a more detailed, spreadsheet-fueled analysis.
If you want to dig even deeper into your real estate education today, check out all the videos on the Housing page at Khan Academy.