Couple talking about home renovation. Standing in the kitchen and discussing apartment renovation ideas.
Buying, Renting

Three Questions to Help Solve Your Rent vs. Buy Dilemma

Jim is divorced, with two grown children and a secure job. He currently rents a condo, but he is approaching his 50th birthday and wondering if he should simply buy it outright. Caroline is in her 40’s and recently widowed with a significant inheritance that would allow her to buy her own home. Pat is a single mother of two, struggling to get by on $40,000 a year. The one question they all have is, “Should I rent or buy a home?”

“Historically,” said Ken H. Johnson, Ph.D., “the American dream has been to own your own home. But is that still the dream? No, not for a lot of us.” Johnson is the Associate Dean and a Professor in the Finance Department of Florida Atlantic University, College of Business. Florida Atlantic University is the fifth public university in Florida, with an annual economic impact of $6.3 billion. Johnson contributes regularly to the Journal of Real Estate Research and the Journal of Housing Research on real estate economics and trends. In the past, he said, it made financial sense to own your home, but now the path to financial security and the most rewarding lifestyle isn’t so clear-cut. Home ownership is still a dream, but it’s not the only dream.

Couple talking about home renovation. Standing in the kitchen and discussing apartment renovation ideas.

After noticing a difference in housing costs, trends, and home ownership, Johnson, along with Eli Beracha, Ph.D., William G Hardin III, Ph.D., created a tool called the Beracha, Hardin and Johnson Buy vs. Rent Index. The index, Johnson said, is designed to signal whether current market conditions favor buying or renting a home regarding wealth creation over a fixed holding period in a particular market.

According to Johnson, the index summarizes 23 major metropolitan housing markets and the U.S. real estate market as a whole (represented by the member index metropolitan areas). Unlike other housing indexes, the BH&J Index adds additional rental, maintenance, and alternative investment data streams, among others, to indicate when and why housing markets might be changing direction.

“The major goal of the BH&J Index is to provide information on the health of housing markets around the country,” said Johnson. “That helps consumers, real estate market professionals, developers, lenders and housing policy makers make more informed decisions.”

And while there is no perfect information source that guarantees optimal results when choosing between buying and renting, the index does provide a solid foundation of information to consider when deciding whether to buy or rent, he said.

Whether or not the economy supports buying versus renting is just one part of the equation for consumers Johnson said. Because people’s life circumstances, jobs, health, age and other factors vary so much there is no “one size fits all answer.” There are, however, three questions people can ask themselves that will give them strong reasons to take one path or the other.

Asian woman welcomes black couple into her house home accommodation for their holiday vacation trip

Question One: How long am I planning to stay here?

Are you a mobile person, changing jobs and residences frequently? Then you’re probably better off renting, Johnson said. “The cost of selling is so high it hurts your accumulation of wealth. If you’re going to be working in Florida one year, then northeast Georgia in two years and planning a move to a better job in New York City in two years, it doesn’t make financial sense to buy. Renting is a better way to build wealth.”

Question Two: Are you going to create more wealth by renting and reinvesting your money, or by buying a house and building equity?

“As a potential renter, if you’re considering renting, you need to consider what you can get regarding a return from reinvesting your rent savings every month, and what your down payment would be,” he said. “When you rent you build wealth through reinvesting versus owning the home and building wealth through building equity minus transaction costs,” said Johnson.

Question Three: What’s more important, owning a dream or owning a big bank account?

“That depends on the individual,” Johnson said. “It can’t always just be about money. You’ve got to consider lifestyle and what you want out of life and your living situation.”

That means money, financial security, and investing are important, but so is the quality of your life, what you plan to do with your future, and where you see yourself in five, ten, or thirty years.

“There aren’t any clear-cut answers because everyone’s situation is different, their income, work situation, dreams and goals vary,” he said. What does matter is that people are willing to sit down and ask themselves these three questions before making any major decisions that could impact their financial future.”

Johnson says he’s not naïve. He knows that saving and investing are not as easy as they sound.

“People need to look at how disciplined they are too, and how committed to saving and investing they are. To be that disciplined saver takes work. People are going to buy cookies and beer, so if you’re serious about saving and you’re in a “buy” territory, and just marginally in the rent territory, you might actually be better off buying,” he said. “Eighteen of the 23 areas we cover are in the buy territory now, and just marginally in the rent category. If you’ve found the right house, in the right area, with the right schools, you’d probably be better off buying – even if you’re in a rent territory. It’s just going to be easy to build equity than reinvest that mortgage payment.”

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Becky Blanton is a full-time ghostwriter and writing coach for Fortune 500 companies, CEOs, and business speakers. In 2009 she spoke at TED Global at Oxford University, her first ever public speaking gig. When she's not writing, she's kayaking in the Chesapeake Bay. Her dream home is to live aboard a sailing or houseboat.

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