Rent vs. Own: How Long You Plan on Owning Can Make a Difference

How Renters and Owners View Homeownership as being Positive

One question that is asked a lot is whether it is better to rent or buy a house?  Whether buying is better than renting depends on several different factors.  For me, the starting factor is how long do you plan to stay in your house?

The general consensus is that if you do not plan on owning a home for more than 2-5 years, it is probably not cost effective to buy as opposed to renting.  Buying a house is a big commitment that requires some foresight.  There are extra costs involved.  There is more responsibility for maintenance, insurance, and taxes.  Although a mortgage payment is cheaper than rent, a lot of the initial costs aren’t recouped until 2-5 years of ownership.

NY Times has a great calculator to show this:  Check it out here.

Reasons as to why it takes 2-5 years for ownership to become cost-effective:

– Mortgages are structured so that there is more interest paid in the initial years of the loan.  This means that for the first several years of owning a home, not very much of your payments will be allocated to the principal of your loan, but rather to interest.  Therefore, you won’t be building much equity in the initial years.

– There are closing costs to purchasing a home.  They differ depending on the house and how your loan is structured, but there is still an initial expenditure other than just your down payment.  Even if a VA or FHA loan was used to reduce the amount needed at closing, those costs were lumped into the loan amount, and will still be paid off over the life of the loan or when the house is sold.  Remember, there are also closing costs to selling a house as well.

– Houses are not liquid assets.  This means that whenever you want to sell your property to get your money back, it may not happen as fast as you would like.  Unlike pulling your money out of a bank, getting your money (equity) out of a house takes time.  This is why you need to think of the exit strategy for your home.  Are you OK with waiting for it to sell?  Or, do you have another plan like keeping your house as a rental?

As you can see, there are several things to consider if you are on the fringe of buying a home, but don’t know whether you will be around for 2-5 years to make it cost-effective.

How to beat the 2-5 year rule

There is a way to lower the timeframe of cost-effectiveness though….

Since most people purchase the biggest house that they can afford (or the bank will let them), a way to lower your payments is to buy a home that is more modest.  It will lower your monthly mortgage payments and free you up to put the extra amount against the principal of your loan.  Depending on the situation, this could make owning more cost-effective than renting in a shorter timeframe than 2-5 years.

Another option would be to purchase a “fixer-upper” and do the work that is necessary.  Whenever you go to sell, even if it is before the 2-5 year mark, you might have created enough equity to have beat the initial cost of owning a home.

 Owning is still considered better than renting in the long-run

As you read through this post, it may be a little discouraging to hopeful homeowners, but it is only meant to reveal the inital cost of owning a home.  If you plan on staying around the area for longer than 2-5 years, you should really look at your options of homeownership.  In the long run, it is often more cost-effective to own a home as opposed to renting.  Plus, having your own place allows you freedom to customize and live in your home the way you see fit.

When it comes to home ownership, there is no black or white answer as to whether one should own or rent.  It all depends on the circumstances of each individual.

Photo Credit: “Trulia American Dream Infographic – Q1 2011” by truliavisuals on Flickr.  CC Licensed.

About Matthew Loewen

I'm a real estate broker in Clovis, New Mexico. I started my own company, Loewen Clovis Realty, as a way to provide my services for those that need it in the area.

Outside of real estate, I am usually biking around Clovis, hanging out with friends, reading, or attending church functions.


  1. AndrewSchaap says:

    I noticed that 18-34 year olds are into ipods, television, and bikes! So true!

  2. CaseyJones1 says:

    Thanks for the advice on renting vs owning.  My wife and I will be moving to For McMurray in the next little bit.  We will just be there for a couple years for work though.  We are trying to decide if we want to rent or buy.  After reading this, I think renting is the obvious choice.  I don’t want to have to deal with closing costs like you mentioned.  I will talk to my realtor about this.

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