In general, is it financially better to buy or to rent a house?
"The general answer is: ""it depends on how long you want to live there"". Here is a good calculator to figure it out: http://www.nytimes.com/interactive/business/buy-rent-calculator.html Basically, if you plan to move in a few years, then renting makes more sense.  It is a lot easier to move from an apartment when your lease is up versus selling a house, which can be subject to fluctuations in the real-estate market.  As an example, during the real estate bubble, a lot of ""young professional"" types bought condos and town homes instead of renting.  Now these people are married with kids, need to move somewhere bigger, but they can't get rid of their old place because they can't sell it for what they still owe.  If these people had rented for a few years, they would be in a better position financially.  (Many people fell for the mantra ""If you are renting, you are throwing your money away"", without looking at the long-term implications.) However, your question is a little unique, because you mentioned renting for the rest of your life, and putting the savings into an investment, which is a cool idea.  (Thinking outside the box, I like it.) I'm going to assume you mean ""rent the same place for many years"" versus ""moving around the country every few years"".  If you are staying in one place for a long time, I am going to say that buying a house is probably a better option.  Here's why: So what about investing?  Let's look at some numbers: So, based on the above, I say that buying a house is the way to go (as long as you plan to live in the same place for several years).  However, if you could find a better investment than the Dow, or if mortgage interest rates change drastically, things could tip in another direction. Addendum:  CrimsonX brought up a good point about the costs of owning a house (upkeep and property taxes), which I didn't mention above.  However, I don't think they change my answer.  If you rent, you are still paying those costs.  They are just hidden from you.  Your landlord pays the contractor or the tax man, and then you pay the landlord as part of your rent." "Forget, for the moment, which will pay off most over the long term. Consider risk exposure. You've said that you (hypothetically) have ""little or no money"": that's the deal-breaker. From a risk-management perspective, your investment portfolio would be better off diversified than with 90% of your assets in a house. Consider also the nature of the risk which owning a house exposes you to: Housing prices are generally tied to the state of the economy. If the local economy crashes, not only could you lose your job, but you could lose a good part of the value of your house... and still owe a lot on your loan. (You also might not be able to move as easily if you found a new job somewhere else.) You should almost certainly rent until you're more financially stable and could afford to pay the new mortgage for a year (or more) if you suddenly lost your job. Then you can worry more about maximizing your investments' rate of return." There's probably no simple answer, but it's fair to say there are bad times to buy, and better times.  If you look at a house and see the rent is more than the mortgage payment, it may be time to consider buying.  Right now, the market is depressed, if you buy and plan to stay put, not caring if it drops from here because you plan to be there for the long term, you may find a great deal to be had. Over the long term, housing matches inflation.  Sounds crazy, but. Even into the bubble, if you looked at housing in terms of mortgage payment at the prevailing 30yr fixed rate and converted the payment to hours needed to work to make the payment, the 2005 bubble never was. Not at the median, anyway. At today's <5% rate, the mortgage will cost you 3.75% after taxes. And assuming a 3% long term inflation rate, less than 1%. You have expenses, to be sure, property tax, maintenance, etc, but if you fix the mortgage, inflation will eat away at it, and ultimately it's over. At retirement, I'll take a paid for house over rising rents any day. I just read through all of the answers to this question and there is an important point that no one has mentioned yet: Oftentimes, buying a house is actually cheaper than renting the identical house. I'm looking around my area (suburbs of Chicago, IL) in 2017 and seeing some houses that are both for sale and for rent, which makes for an easy comparison. If I buy the house with $0 down (you can't actually put $0 down but it makes the numerical comparison more accurate if you do), my monthly payment including mortgage (P+I), taxes, insurance, and HOA, is still $400 less than the monthly rent payment. (If I put 20% down it's an even bigger savings.) So, in addition to the the tax advantages of owning a home, the locked in price that helps you in an economy that experiences inflation, and the accumulated equity, you may even have extra cash flow too. If you were on the fence when you would have had to pay more per month in order to purchase, it should be a no-brainer to buy if your monthly cost is lower. From the original question: Get a loan and buy a house, or I can live for the rest of my life in rent and save the extra money (investing and stuff). Well, you may be able to buy a house and save even more money than if you rent. Of course, this is highly dependent on your location. An important factor you failed to mention is the costs associated with owning a home.  For example, every 10 / 15 years, you have to replace your AC unit ($5k) and what about replacing a roof (depends on size, but could be $10k)?  Not to mention, paying a couple thousand annually for property taxes.  When renting, you never have to worry about any of these three..... Which is generally the better option (financially)? Invest. If you can return 7-8% (less than the historical return of the S&P 500) on your money over the course of 25 years this will outperform purchasing personal property. If you WANT to own a house for other reason apart from the financial benefits then buy a house. Will you earn 7-8% on your money, there is a pretty good chance this is no because investors are prone to act emotionally. Property in general tends to go up in value.  That's one advantage you won't get if you rent.
you are discounting the cash used, the discount rate for cash should be whatever you determine is your risk premium over the risk free rate not the equity growth rate. if equity growth rate is above your determined required return the equity investment is wealth destroying and if it is above that then it is wealth increasing.   The difficulty I see is that the scenario is all wrong, what you are really after is a rent vs buy decision. Do I take this money and rent a place or do I buy a house? In either case you could invest the remainder after paying your rent/mortgage in the equity market no?  So what really matters is the difference in cost between renting and buying.   Let  (EGR)=equity growth rate  Rent = rent M = Mortgage payment  I = income  HA =  home value appreciation  Now the question is is renting or buying a better decision two scenarios, renting first  PMT =(I - rent)  I/y = (EGR)  N =Time horizon in years  FV= Gain from cf left after paying rent    then discount to present day at your required rate of return to find present value  now scenario for buying, this is more complicated because you are investing two different cf streams at different rates and have to calculate both and add them together.  1) CF 1 the mortgage payments buy you equity in the house which appreciates (hopefully) but can be extremely volatile. This is the cf stream scenario one doesnt have, when renting the rent payments poof disappear forever and you earn nothing on them 2) The income left after mortgage payment which can be invested at the market rate measured the same way as above. **This is extremely simplistic and doesnt take into account expected maintenance, property taxes and other costs intrinsic to the investment. It also doesnt take into account the lost down payment setting you well behind the renter.   TL DR: It is complicated but you determine the required return(discount rate) based on the perceived risk of the investment and your particular views  and it doesnt matter what expected growth rates are since any investment with an expected growth rate below your required rate is wealth destroying since you are paying for something which returns cash flows too small for its risk level. If you use growth rates as discount rates then all your investments will net to zero NB - I live in Surrey and bought my house in January 2014. If you don't have a very social life, it does pay to stay outside London. Places outside London are cheap and you will get a better deal in relation to houses or flats as compared to London. I feel very priced out of the market regarding London mortgages I will strongly question you logic behind this ? Why only London ? Why not live in the commuter belt outside London. Good places to reside, good schools, nice neighbourhood and away from the hustle and bustle of London. Many of my colleagues commute from Cambridge and Oxford daily into Central London and they laugh at people who want to buy a house in London, just for the sake of buying a house. It seems that the housing market is generally in a bubble due to being distorted by the finance market London house market is different from the rest of UK. People from overseas tend to invest in London property market, so it is always inflated. Even the property tax hasn't deterred many. I could look into buying somewhere and renting it out You are trying to join the same people, because of whom you have been put out of the housing market. I strictly question this logic unless your mortgage is less than the rent you pay and what rent you get. Buy a roof over your head first, then think of profiting from property. It's hard to financially justify buying a house just for one person to live in. You end up being 'over-housed' (and paying for it). Would you rent a whole house for yourself?  A condo might be an option - but TO ME the maintenance fees are hard to take (and they are notorious for increasing dramatically as the building ages). You could consider buying a house that includes 1 or 2 rental units, or sharing with a friend. You do run the risk of having bad tenants though, and you have additional maintance to deal with. Having a rental unit in my modest house has worked out very well for me (living alone), and I have been VERY fortunate with tenants. "Note: I am making a USA-assumption here; keep in mind this answer doesn't necessarily apply to all countries (or even states in the USA).  You asked two questions: I'm looking to buy a property. I do not want to take a risk on this   property. Its sole purpose is to provide me with a place to live. How   would I go about hedging against increasing interest rates, to counter   the increasing mortgage costs? To counter increasing interest rates, obtaining a fixed interest rate on a mortgage is the answer, if that's available.  As far as costs for a mortgage, that depends, as mortgages are tied to the value of the property/home.  If you want a place to live, a piece of property, and want to hedge against possible rising interest rates, a fixed mortgage would work for these goals. Ideally I'd like to not lose money on my property, seeing as I will be   borrowing 95% of the property's value. So, I'd like to hedge against   interest rates and falling property prices in order to have a risk   neutral position on my property. Now we have a different issue.  For instance, if someone had opened a fixed mortgage on a home for $500,000, and the housing value plummeted 50% (or more), the person may still have a fixed interest rate protecting the person from higher rates, but that doesn't protect the property value.  In addition to that, if the person needed to move for a job, that person would face a difficult choice: move and sell at a loss, or move and rent and face some complications. Renting is generally a good idea for people who (1) have not determined if they'll be in an area for more than 5-10 years, (2) want the flexibility to move if their living costs rises (which may be an issue if they lose wages), (3) don't want to pay property taxes (varies by state), homeowner's insurance, or maintenance costs, (4) enjoy regular negotiation (something which renters can do before re-signing a lease or looking for a new place to live).  Again, other conditions can apply to people who favor renting, such as someone might enjoy living in one room out of a house rather than a full apartment or a person who likes a ""change of scenes"" and moves from one apartment to another for a fresh perspective, but these are smaller exceptions. But with renting, you have nothing to re-sell and no financial asset so far as a property is concerned (thus why some real estate agents refer to it as ""throwing away money"" which isn't necessarily true, but one should be aware that the money they invest in renting doesn't go into an asset that can be re-sold)." "Whatever you do, you need to be saving a lot more to have a good chance at retirement at a reasonable age. With a combined salary of $150,000, I'd recommend: In total, that's $47,000/year in tax advantaged accounts, plus whatever you put into taxable accounts. Your $150,000 yearly income, less $90,000/year in savings is still an income of $60,000. People live comfortably and raise families on a lot less. Consider how fortunate you are. You could retire in 10 years, if you wanted, by increasing your savings and decreasing your expenses. Seriously, I'm speaking from first-hand experience. If you stay on your present course (saving $2,000/mo), at a 7% real return, you'll need about 37 years to accumulate $3,800,000 (in today's dollars), which is enough to: Even if those student loans are forgiven, that only knocks off about 2 years. If you are in your late 30s now, there's a decent chance you'll be dead before you retire. As for buying a house or not, this depends a lot on your personal circumstance and how the rental market in your city compares. In your decision, don't forget to consider: Renting is not necessarily throwing money away any more than buying a house is. If you take out a mortgage, you'll be ""throwing away"" a lot of money anyway. Look for a ""loan amortization calculator"" to see how much goes to interest versus principal. For a $500,000 loan at a 3.5% rate, you will be paying approximately $1400 per month in interest versus only $800 towards the principal. When you deduct insurance, taxes, maintenance, etc from that $800, you may find you are still throwing away most of your monthly payment on interest and expenses you wouldn't have if you rented. The money you do ""save"", after interest and expenses, isn't really saved. Housing markets go up and down, but on average, over the long term, they go up just enough to keep up with inflation, meaning a 0% real return. If renting means less cash out of pocket per month, you can put that extra cash towards investments that yield a much higher return. Sure, you may need to continue making rental payments in perpetuity, but you can save enough extra money to pay for the rental in investment income. Again, it depends considerably on how the housing and rental markets compare where you live. Popular cities (San Francisco, New York, Paris, etc.) tend to favor renting. Unpopular cities (Detroit, St. Louis) and rural areas tend to favor buying. Further reading: Mr. Money Mustache: Rent vs. Buy: If You Have to Ask, You Should Probably Rent" "I've never heard of rent quoted per week. Are you in the US?  In general, after the down payment, one would hope to take the rent, and be able to pay the mortgage, tax, insurance, and then have enough left each year to at least have a bit of emergency money for repairs. If one can start by actually pocketing more than this each year, that's ideal, but to start with a rental, and only make money ""after taxes"" is cutting it too close in my opinion. The 19 to 1 ""P/E"" appears too high, when I followed such things I recall 12 or under being the target. Of course rates were higher, and that number rises with very low rates.  In your example, a $320K mortgage at 4% is $1527/mo. $400/wk does not cut it." "Remember that the rental market and the property market are markets.  For any given location and level of quality, if it were a clearly superior choice to buy over rent, then more people would buy, and less would rent, driving prices down for rentals.  The value of ""owning"" as opposed to paying rent and never owning is priced into that, at least at locations and levels of quality where owning is a possibility (and that is nearly always a possibility, even at very low levels of quality). This is true even disregarding your personal circumstances, unless you're looking in an area that has a lot of people like you (San Francisco, perhaps).  Given your personal circumstances, you have strong incentives to be on the renting side, unless there are major pressures on the housing market that cause property to be far cheaper than it should.  This was true in 2009-2011, but is mostly not true anymore (though some areas have yet to fully come out of the crash)." The simple answer is that you are correct. You should not purchase a house until you are financially stable enough to do so. A house is an asset that you must maintain, and it can be expensive to do so.  Over the long term, you will generally save money by purchasing. However, in any given year you may spend much more money than a similar rental situation - even if the rent is higher than your mortgage payment. If you are financially stable with good cash savings or investments plus a 20% down payment, then anytime is a good time to buy if that is part of your financial plan. As of now in 2016, is is safe to assume that mortgage rates   would/should not get back to 10%?   Does this mean that one should always buy a house ONLy when mortgage   rates are low? Is it worth the wait IF the rates are high right now? The mortgage rates are not the primary driver for your purchase decision. That might be like saying you should buy everything on sale at Target... because it's on sale. Don't speculate on future rates. Also, keep in mind that back when rates were high, banks were also giving much better savings/CD rates. That is all connected.  Is refinancing an option on the table, if I made a deal at a bad time   when rates are high? You need to make sure you get a loan that allows it. Always do a break-even analysis, looking at the money up-front you spend to refi vs the savings-per-year you will get. This should give you how many years until the refi pays for itself. If you don't plan on being in the house that long, don't do it. How can people afford 10% mortgage? Buying a house they can afford, taking into consideration the entire payment+interest. It should be a reasonable amount of your monthly income - generally 25% or less. Note that this is much less than you will be 'approved' for by most lenders.  Don't let good rates suck you into a deal you will regret. Make sure you have the margin to purchase and maintain a home. Consider where you want to be living in 5 years. Don't leave so little financial breathing room that any bump will place you at risk of foreclosure.  That said, home ownership is great! I highly recommend it.