The Economics of Owning, Renting and Leasing

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While home ownership claims to promise stability, freedom and an equal, if not greater, return on your investment, it doesn’t always deliver. Hence, the question: to own or not to own? Well, there’s no clear answer…and there are plenty of opinions.

Making the case for buying:

You’re looking to settle down. These are the most transient years of your life, meaning anything – from a new job to a new love – could jettison you across the country, if not the world. If you do plan on sticking around for the next five to ten years, however, buying could be the choice for you.

You can afford it. Paying off consumer debt is your first priority. If this is not an issue for you, then go for it. Maybe. The magic number for securing a low interest rate loan on a house is typically 20%. You can get away with ten, but a lower down payment often comes with higher interest rates.

You heart tax breaks. On the other hand, did you know that property taxes and interest payments on your mortgage are tax deductible?

You’re a DIY die-hard. Within a year, leaky pipes, broken water heaters, downed trees and other shelter-related catastrophes could potentially creep into the thousands. Some homeowners stash away 1% of their home’s value to cover these annual nuisances. But if you know your way around a tool belt, home ownership could be just the right notch for you.

Making the case for renting:

You’ve still got oats to sow. If you plan on moving within the next five years, or even daydream about moving, stick with the renter’s market. A house is not only an investment: it’s a home, and one of the biggest commitments you’ll ever make. Plus, buying and moving too soon could cost you your investment and then some.

You really can’t afford it. Conventional wisdom states that homeowners can comfortably afford a house that costs roughly two-and-a-half times their annual income. If you can’t fit that in your budget quite yet, you’re better off renting.

You heart flexibility. For many, buying a home is one of those “must-dos” that gets lumped in with the rest of the American dream. But maybe your version of success includes liberty, freedom and mobility. Surely, those values are just as American as a mortgage?  

The market’s wrong. There actually is a scientific method when it comes to all this and it’s not all that complicated. It’s called the price-to-rent ratio (or P/R ratio). You can tabulate it by:

  1. Finding two similar houses, one for rent and the other for sale
  2. Then dividing the sale price by the annual rent

Basically, a rent ratio of 20 and above means that you’re living in a renter’s paradise, and you should take advantage of it.

You’d rather die than DIY. The way you see it, there’s no shame in letting the landlord deal with rodents, pipes, sewage and garbage. That’s why you rent: because it’s not your problem. However, regardless of your reasoning, keep in mind that your total cost of housing (principal + interest + insurance + taxes) should never exceed 28% of your gross income.

Let’s talk cars…

Making the case for owning:

Because it’s yours. About 80 percent of auto consumers pay cash for their car or finance it with, say, a 60-month loan. What do they get at the end of that term? Their very own car that they can keep, crash, sell or trade on their own terms.

Those oats again! When it comes to buying vs. renting a house, the opposite rules apply for purchasing a car. If you can’t predict what your life will look like in three years, you’re better off buying a car. Why? Because even though leasing affords you less money down and reduced monthly payments, terminating a contract early could cost you big-time. 

You’ve read the small print. Leasing a car is cheaper than buying one, but most contracts only allow you 15,000-18,000 miles per year. If at the end of that lease you exceed those miles, you could end up paying 15 to 20 cents for each additional one. So much for that transcontinental love affair…

It fits your budget. One of the most important factors when deciding to lease, rent or buy should be whether you can afford the payment in your monthly budget. A general rule of thumb is that your total debt payments (mortgage, credit cards, student loans, etc.) should not exceed 36% of your gross income.

Making the case for leasing:

Because freedom is your American Dream! One-fifth of drivers are not owners. These are your freedom-loving, upwardly mobile consumers that like new cars, innovative engineering and the overall flexibility that comes with leasing. At the end of your term, what do you get? Keys to an even hotter car.

You do love a good tax incentive. If you’re self-employed, you may be able to write off [link to à Taxes à Understanding Taxes (34)] some of your leasing payments as a business expense.

Ultimately, it’s a car. Meaning it’s a depreciating asset and an expensive one at that. At the end of your lease, you might not end up with a car of your own. But you won’t end up with a clunker you can’t get rid of, plus any hefty repair bills.

The bottom line:

  • Ownership offers stability, a personal investment opportunity and in some cases, automatic savings.

but…

  • A house is not a bank account. It’s a home, which you can make anywhere.

and…

  • Cars can be anything but stable.

Your bottom line:

No matter what option you choose, make sure you’re working your budget and saving for the future that makes the most financial sense for you.