Renting Apartment vs Buying Small House

October 16, 2010

Because I do not have a place of my own to live in, these two options have been given a lot of thought this past year.  I have read many “Rent vs. Own” articles and run some numbers, and have come to the conclusion that renting or owning your home is really a lifestyle choice.  It is NOT a financial investment. Why do I say that?  Because in the end, housing is an expense.  It is something you have to pay for.  Either way you go, it comes out approximately the same.

Let’s look at some real world numbers.  Now, as a single person and a minimalist, I do not need much space.  The smallest house available locally is a 2 bedroom, 1 bath bungalow.  There are some efficiency apartments here and there, but I’ll compare to the basic one-bedroom apartment.  For this example, let’s assume I’ll be staying in one area for five years.  Also assume I have 100K saved in the bank and will not be using a mortgage.

Renting a one bedroom apartment in my area costs about $650/month.  Add $150 for utilities, $200 for food, and $100 for internet/phone.  Round up to $1200/month or $14,400 per year.

There is a small house for sale today, close by in a good neighborhood, closer to work, for an asking price of about $90,000.  If I keep the 90K in the bank and earned an average of 1.5% interest over five years this would give me $7000.  Subtract this from apartment expenses (14400 x 5 – 7000) would be net total $65,000 spent over five years for the apartment option.

There are two big variables in the house option that I can’t predict.  One is the market value of the house.  Because housing prices have dropped over the last two years, and some experts are saying prices are not likely to rebound quickly, for our example I’ll assume that the house value stays at 90K.  This may be unlikely, but I have to pick a number so that’s what I’ll use for now.  The other variable is renovation cost.  What if the roof needs to be repaired?  The plumbing?  The driveway resurfaced?  Again, I have to choose a number so I’ll say 10K for repairs over 5 years.

So I buy the house for 90K cash.  Annual taxes are about 4K.  Monthly costs 250 utilities, 200 food, 100 internet/phone.  That’s 10600 per year for 5 years is 53K.  Add the renovation cost of 10K and we’re up to 63K.  I’d probably get insurance for a house, so that’s $3000 over 5 years.  When I sell at the end of 5 years there’s a real estate commission of 6%, or $5400.  So I pay 90K and get about 90K back, therefore value of the house comes out even.  But over the five years I paid a total of $71,400 to live there.

Granted this is a simplified/approximated example, but it shows that owning a house without a mortgage is not necessarily less expensive than renting.  In fact it could even cost more.

As a minimaist lifestyle choice, apartments are better because it’s much simpler.  No dealing with contractors or repairmen, insurance agents, real estate agents, tax collectors, etc.  You just pay your rent on time and the landlord does all that for you.  Plus you have the flexibility of moving when your annual lease is up if you want to.  Less money, more freedom.

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