To buy or to rent is the question
Do I just rent a place so I won’t have to worry about long-term mortgage or do I just buy my own unit so the money I pay for rent won’t go to waste?
Like any choice we have to make in life there’s always a price to pay and a benefit to reap. It’s no different in the question of renting or buying; and there’s really no right or wrong answer.
A few years back, before I became a financial planner, I’ve thought that renting is just a waste of money and buying is the way to go. However, a friend who’s been renting for years gave me another perspective that made me realize that this is not an investment problem. In reality a big factor for making the choice would hinge on one’s cash flow and personal preference. Hopefully the pros and cons can help you realize what your personal preferences are in making a decision between buying and renting.
Pros: One of the major reasons for buying a property, which makes sense to many people, is that buying makes their home their own. It can be a good investment in the long term; the value of the property could increase as time goes by. A home owned is also an additional asset that can generate an income, assuming it is rented out.
Cons: Buying a property can come with a steep price. Assuming you will get a loan to finance the purchase, you will have to deal with monthly amortization for the next 5-15 years, or even longer. Monthly amortizations are often higher than monthly rent. This means a portion of your income will have to be allocated to paying this loan, which would leave you with less for your other needs including savings/other investments.
Now, with the knowledge of pros and cons of buying, the real question to answer is, are you willing to allocate a bigger chunk of your income for paying monthly amortization in the next few years?
Pros: The obvious benefit of renting is that you won’t have to worry about any loans that can claw into your cash flow for years. You can allocate more for savings and maybe get into other investments that can also make your money grow. Another advantage is that you won’t have to worry about moving appliances or furniture when later on you decide to move due to reasons like change in work location. Plus renting allows you the flexibility of looking for a place that may be close to your work place and would suit your current lifestyle.
Cons: The place you are renting is not an asset you can call your own. Given that a property can be a good source of passive income, you might lose the chance of earning passively assuming you decide to have your own place rented out.
For renting, the real questions to answer are not whether money is wasted because you are just giving it to someone else (besides, we have to change the mindset of money being wasted because some others are earning from you). If you are unsure whether to rent or not, the questions to answer are: would owning a property be valuable to you at this point in my life? Is your current lifestyle and work arrangements more suited to renting at least for now?
My take on personal finance has always been less on “how much money I make or spend” and more on “how meaningful would this be for me.” So the answer to this “buy or rent” debate would depend on what’s most important and meaningful to you now and in the immediate future. Don’t force the situation if you’re not ready and don’t pass up the opportunity if you are.
Jeremy Jessley Tan is Registered Financial Planner of RFP Philippines. To learn more about investment and estate planning, attend the Chartered Trust and Estate Planner (CTEP) Program this July 2. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail><CTEP> at 0917-9689774.
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