Which Is More Profitable: Buying or Renting?

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NEW YORK (MainStreet) – New research says renting a home is generally more profitable than buying – except under unusual economic conditions like those of today.

In other words, if you plan to stay put long enough, even the most adamant advocate for renting would probably concede that buying can now put you more in the green.

What tips the balance? Today’s beaten-down home prices, low mortgage rates and rising rents.

Housing experts have long known that home ownership is not the terrific investment that many people think it is. On average, home-price gains barely beat inflation, creating an investment return far below the average on alternatives like stocks. Add ownership costs like mortgage interest, taxes, insurance and maintenance to the mix, and the typical home is a money loser.

Of course, renting is a money loser too. So the question is: Which one is worse?

A new study (PDF) by two finance professors, Eli Beracha of East Carolina University and Ken H. Johnson of Florida International University, finds that on a pure financial basis, renting has been preferable to owning about 75% of the time during the 32 years ending in 2009.

But that involves the key assumption that the savings realized from renting are invested, not spent. Renters who spend the money that would have gone to a down payment and higher monthly costs if they had bought lose the financial benefits of renting.

Buying, on the other hand, means taking on a forced-saving program, making it better than renting for the weak willed.

However, the study uses another assumption that does not apply to everyone: a homeownership period equal to the average of about eight years.

People who will stay put for shorter periods are even less likely to do better as owners because there is not enough time for rising home values to offset big expenses of buying and selling, like transfer taxes, loan application fees, appraisal and realtor’s commission.

But those who stay in their homes for the long term are more likely to benefit from owning because rising home values will have time to offset those extra costs of ownership. The homeowner then starts inching ahead of the renter because mortgage costs are fixed while rents continue to rise.

While renting has been more profitable most of the time, the study’s authors say current conditions are one of the exceptions, because home prices have been hammered by the real-estate bust and mortgage rates are at historic lows. Meanwhile, high unemployment and tough mortgage standards have forced more people to rent, with higher demand and flat supply driving up rents.

A recent study by The Wall Street Journal, using data from Zillow, found that homes are more affordable today than at any time over the past 15 years.

Though many people might find buying better than renting under today’s conditions, this does not mean that it makes sense to buy the most expensive home you can afford. Over the long term, it is generally more profitable to own an inexpensive home because the savings can then be put into more profitable investments, such as stocks.

For more news and tips on the housing market, visit MainStreet’s Real Estate topic page!

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