Despite what your traditional business intuition may be telling you, renting a home is generally more profitable than buying one under regular economic conditions. However ‘regular economic conditions’ don’t exist currently (and haven’t for a while now) leading some analysts to suggest that 2012 could be a highly profitable year to purchase a home.
Why is renting normally more profitable than purchasing a home?
The myth that owning a home is a worthwhile investment has been largely exposed through the financial meltdown of 2008, however, housing market analysts have known for quite some time that owning a home isn’t nearly as profitable as the public generally thinks.
The primary factor leading to this misconception is that owning a home forces you to save money. When you take out a mortgage and purchase a home you have essentially required yourself to stash a substantial portion of your income away into an asset. This in and of itself gives off the illusion that you’ve made a smart move, however, when looking at actual home price gains you’ll see that they barely beat inflation. This isn’t even taking into consideration the money you lose on mortgage interest, property taxes and maintenance. So in other words, you could have done much more productive things with your money other than purchasing that home.
If those who rented a home took the difference of their would-be mortgage payment and what they spend on rent and stashed that away into a diverse array of assets such as stocks, bonds, etc., they would more often than not be realizing more in returns on their assets then they would if they simply purchased the property.
Keep in mind, this is assuming ‘normal’ economic conditions.
2012, on the other hand, opens new doors for potential home buyers that in some cases have never been seen before. For one, interest rates on mortgages are at all-time lows in records going back to 1971. Combine this with another record – number of foreclosures on the market – and you’ve got a very unique buying opportunity.
The big “if” on whether you should buy or rent your home in 2012, depends largely on whether or not you plan on staying put for a long enough time. According to this recent study conducted by two financial professors at Florida International University, the magic number in weighing your decision will likely be around eight years. If you’re purchasing a home that you plan on staying in for eight years of longer, then 2012 could prove to be an unrivaled time to jump into the market, however, if there’s a chance you may need to sell before the eight year mark, you may not have allowed for enough time to offset the major up-front expenditures of buying and selling a home – such as tax transfers, home loan application fees, appraisal and realtor’s commission – with the inevitable rebounding of the housing market.