Everyone must live somewhere; so it is necessary to incur a housing expense by either buying or renting a home or other unit of housing – except for those who live with their parents or other relatives. Therefore, the question of whether it is more beneficial to buy or lease is a common decision that must be made any time that a move is made. This is a very personalized decision and one that cannot be answered with one simple answer that is appropriate in all instances, but is a question worthy of consideration prior to entering into either a purchase or lease commitment. In either event, it is likely that a significant portion of the individual or family income will be expended for monthly housing (shelter) expense.

With the significant changes in the overall economy, mortgage financing and housing value landscape since the last quarter of 2008, there have been numerous articles written and many changes in the perceptions regarding this issue and reasonable people have come to completely opposite conclusions on the issue. I recently read that a well respected professor of economics at a highly regarded university wrtote that “renting is always preferrable to purchasing”. I believe that if the assumption is made that people who purchase their homes always make the purchase at a highly inflated price and will always be forced to sell at a time in which housing values have plummeted, this would, in my opinion, be a reasonable conclusion.

While it is unquestionably true that there were many segments of the real estate market where the housing prices escalated at double digit annual increases over several consecutive years, in some extreme instances over 20% per year, then fell precipitously leaving some homeowners with properties valued at only 40% to 50% of what they paid for the property, it is also without question that this formula does not apply to all real estate markets nationwide. Obviously, if a purchase was made at the peak of the market and the values then fall precipitously, the purchase could not be deemed to have been a wise financial decision. Despite all of the media hype about the decline of housing values and the huge numbers of homeowners being “upside down” in their homes and mortgages, this is not a universal situation for all housing markets. Despite the fact that many people lost lots of money investing through Bernie Madoff, I am not willing to conclude that investing is therefore, always a poor financial decision.

There are numerous factors impacting the individual buy or lease question and the “right answer” varies greatly depending upon specific circumstances. For example, if it is highly likely that it will be necessary to move again within a short time, it is almost a certainty that renting will prove to be a better financial decision than buying. Even in those market areas where housing values are stable or increasing, it is reasonable to conclude that when one considers the costs of selling a residence (commissions, closing costs and/or Buyer or Lender required repair expenses), it is highly likely that if one sells within three years of purchase, it will involve a loss. Another important consideration is the up-front costs of a purchase compared to those of leasing. For the purchase of a $250,000.00 residence, it is safe to assume (even with the minimum required cash down payment and closing costs) that the total up-front costs to purchase the home would be slightly over $15,000.00. Assuming the same market value of the rental property, the up-front costs would likely be slightly over $5,000.00 (including first month’s rent, one month’s rent as a security deposit and the application and credit reporting fees). The reality is that many would be purchasers simply do not have the available funds to purchase the home.

The price to purchase a home and the typical rental rate for a lease are based upon the actual market value of the property. Typically, the monthly lease rate for a residential property is approximately 1% of then current market value of the property; therefore, a residence with a market value of $250,000.00 will lease for $2,500.00 monthly. The estimated total monthly payment for the $250.000.00 property with the up-front purchase costs indicated above would be (using mortgage rates currently available) $2,020.68; so considering only monthly payments, it is reasonable to asume that the monthly expenditure for purchasing the property would be substantially less than the monthly lease payment. Obviously, one may choose to lease a significantly less expensive rental unit and have a lower monthly lease payment, but the reality is that persons with the necessary income to lease the more expensive properties normally do so. They tend to make that decision based upon the same criteria used in selecting a home to purchase; namely, location, neighborhood appeal, school attendance zones, commute times to employment or entertainment centers and perceivied address prestige.

While I find it impossible to arrive at a conclusion as to whether buying or leasing is the correct financial decision, there are certain realities which are extremely important considerations.

When Purchasing a home, the positives include:

* Substantial tax deductions including the mortgage interest payment and many of the out-of-pocket closing costs
* Long term stability of monthly housing expense (generally resulting over-time in a reduction of housing expense as a percentage of income)
* Property value appreciation often resulting in building a significant increase in total net worth
* Pride of ownership

The negatives of purchasing include:

* Higher up-front costs of purchase relative to up-front leasing costs
* Lack of liquidity (it takes time and money to sell the property)
* Normal expenditures for repair and maintenance of the property
* Long term financial obligation (generally in the form of a long term mortgage)

When leasing a residence, the positives include:

* Substantially lower up-front costs (also, a significant portion of the up-front cost is the security deposit which is normally refunded at the end of the lease term)
* Ease of moving (generally, only a 30 to 60 day notice is required at the end of the lease period)
* No major long term financial commitment
* Most major repair and maintenance costs are paid by the landlord; not by the tenant (except those expenses for property damage by the tenant)

The negatives of leasing include:

* Periodic increases in lease payments (as property values increase, so do rental rates)
* No portion of residential lease payments are deductible from income taxes
* Lease payments are strictly expenditures and do not build equity in an asset

The above comparisons of positives versus negatives for buying or leasing are not intended to be comprehensive, but do represent some of the major considerations for most individuals or families and will, I hope, serve to provide a beginning basis for making this important decision.

Finally, it is almost required in any discussion of the Buy Vs. Rent question to talk about “investment”. It has so often been stated that “real estate is the best investment” it has almost become a cliche. I, for one, do not necessarily consider the purchase of a home as an investment, but rather as a choice as to how one spends the dollars required for housing expenditures. Clearly, investment dollars are invested with the clear objective of generating gains and providing income or asset accumulation to be used for income replacement at retirement, current income or wealth accumulation. While the purchase of a home may provide long term financial gain or growth in asset value, the principal objective of a home purchase is simply to provide shelter in a comfortable and pleasing environment. There are, however, some distinctive advantages in the purchase of one’s residence as compared with most other investment vehicles.First among these are leverage. When you purchase a home in a stable or increasing market, you own the asset appreciation on the entire asset even though you have not yet made the entire investment. Using the example above of the $250,000.00 home, the appreciation over a five year period at only a 4% appreciation rate would be approximately $54,000.00 while your total out-of-pocket cost would be $87,955.48. Further enhancing the value of this”investment” is the fact that of the entire out-of pocket expenditure of $87,955.48, the income tax deduction generated from that purchase would be in excess of $45,000.00.

In comparison with other traditional investments a $250,000.00 asset would require an up-front cash expenditure of (you guessed it) $250,000.00. If this investment were to generate a better return than the property value increase of the home – let’s say for example 6% per year return, the asset appreciation (gain) would be $84,556.39. Now, it does not require an accounting degree to realize that $84,000.00 is substantially more than $54,000.00, but it should be noted that it required the full $250,000.00 cash expenditure to acquire it rather than the $88,000.00 cash expenditure spread over five years in the residential purchase. I will readily admit that this is not an “apples-to-apples” comparison and the investment in securities or other investment vehicles is substantially more liquid. You can easily phone your investment advisor and have all of your money or any portion of it you designate typically within four to five business days whereas selling a residence and receiving the proceeds check from the sale may be expected to take months; not days.