Do I buy, or do I rent? It’s a question that’s endlessly contested, and perhaps rightly so as economic, social and market factors shift over time. That said, the binary answer choices to the familiar question are quite limiting and ignore a third option – buying a property that gives you the option to rent a portion out. If you’ve ever toyed with this question, keep reading to figure out if buying to rent might be a good choice for you.
Buying vs. Renting: The Math Is Not That Simple
First, if you’re in a position where you have the option to either buy or rent, congrats! It takes a lot of hard work and diligence to reach that point. Now, down to business. When we read rent vs. buy articles, or plug and chug numbers in a rent vs. buy calculator, the conclusions are usually based on the comparison of total monthly costs of buying with a mortgage vs. monthly rent. Simplifying to total monthly costs can cause those calculations can be misleading and can cost folks thousands of dollars in the long run.
With some exceptions (you plan on moving, etc), buying frequently wins out over renting for building wealth over time if you dig deeper into the numbers. Think about it – every time you send in a mortgage check, you’re contributing an increasing percentage of those funds to the equity in your home. That equity combined with appreciation over time (even if it’s just keeping up with inflation) helps to ensure you’re accumulating wealth. On the other hand, your monthly rent check is going to your landlord for the duration of the lease, but you don’t get anything in return once your stay is up. Additionally, you can’t guarantee that your landlord won’t increase your rent to keep up with market rates over time. With traditional mortgages, your payment remains fixed for the duration of the repayment term.
As with any investment, there are expenses and risks involved. You’re probably wondering how maintenance, taxes, insurance, etc. factor in and for good reason – it adds up. Still, evidence points to a correlation between homeownership and positive gains despite the additional costs. In fact, a study by the Joint Center for Housing Studies of Harvard found that this notion held true even during the boom and bust period between 1999-2009. The key is to buy a house within your means and to maintain that ownership for the long run.
Buying to Rent: A Better Alternative
It’s clear that there are solid benefits to homeownership, but wouldn’t it be awesome if you could offset some of the costs? That’s where the buy to rent option comes into play. By selecting a house that allows you to generate a bit of income (whether it be a traditional multifamily, a single family with an extra room or in-law apartment, etc.) you’ll be able to build the same equity using less of your own money. This frees up a little extra cash that you can put towards various projects, expediting the repayment of the mortgage, or your next investment.
In addition to having a few extra bucks back in your wallet, there are a number of other advantages that come with having the ability to rent out your property. In the short term, it may help you to be more mobile while still being able to hang on to your property. This allows you to reap the benefits of longevity. Long term, you’ll have a steady and somewhat passive income that you can use to travel, fund your retirement, or whatever else you can think up.
So, what’s the catch? It’s going to take a some extra work on your part to manage. By becoming a landlord, you’ll be responsible for learning your state’s housing laws, finding tenants, drafting leases, and maintaining the property. Additionally, having tenants and extra income may impact your taxes and insurance. Think long and hard about whether or not you’re willing to take on the additional work and risks. Talk to some experienced landlords about what it’s like. They’ll be more than willing to share some tips and tricks they’ve learned along the way. It’s not for everyone, but if you’re up for the task, it can lead to great gains and increased financial freedom.
What do you think? Is buying to rent for you? Join the conversation below!