Rent or Buy?

A recent Bloomberg article, Recession Generation Opts to Rent Not Buy Houses to Cars, illustrates how different generations manage their finances based on their economic experience. The article makes the case that the Great Recession may have hampered Gen Xers and Gen Yers chance for building wealth. The article states:

For those who choose to rent not buy, there’s a price to pay, said Lubell of the Center for Housing Policy. By foregoing purchases of assets like homes, young people are giving up on a chance to build wealth, he said.

“What you are seeing is a delay in all the kinds of decisions that require a long-term financially stable future,” Lubell said. “That’s home purchases, that’s marriage and that’s having kids.

I disagree. While I wholeheartedly believe in buying assets like homes and cars, paying them off fast and using them longer than your average buyer, there are other factors to consider. Some cars are more reliable than others, and houses have a tendency to have added costs like windows, paint, and appliances. These expenses can add up, being counterproductive to your cash flow. Cash flow is really the key to building wealth.

While most of the time financially savvy people do buy cars, they usually buy cars that will last a long time. Regarding home ownership, I’ve ran across two financially savvy renters. One stays in a nice town home and pays rent equivalent to mortgage payments. Because he doesn’t have added maintenance costs, he is able to save $1,000/mo, equivalent to a large maintenance item of ownership like windows, in his taxable account. He is also funding $5,000 in a Roth and contributes the maximum amount to his 401k. Grant it, he has a nice income, but has streamlined his expenses so that he can save as much as he does.

The other renters I met were retired professors that had taught overseas and in the US and never bought a home because they preferred the mobility. With a nest egg of over $2 million dollars, they could afford to buy a home outright, yet they considered renting a way to live where they wanted, when they wanted. Their rent was about half the costs of a mortgage with an equivalent standard of living.

The key for both renters was that they understood cash flow, and lived below their means. They were capable of saving extraordinary amounts by allowing a budgeted amount for their housing expense. So the next time you are faced with rent or buy, remember that it doesn’t matter, as long as you are saving enough to fund your goals.