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Real Estate: Renting or buying a home

 

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Question:

How do I decide to buy or rent a home?

Answer:

The three essential factors that affect the breakdown of renting versus buying the most are:
  1. cash flows
  2. term
  3. appreciation.

If the relative cash flows are mostly the same, then the other two factors influence the analysis the most. The longer you hold the house, the less appreciation you need to beat renting.

This correlation always holds, but the scale changes. For shorter holding periods you also face a risk of a market downturn. If there is a significant risk of a market downturn you shouldn't buy a house unless you are willing to hold the house for a long period.
If you have a nice cheap rent controlled apartment, then you should probably not buy.

There are other variables that affect the analysis, for example, the inflation rate. If the inflation rate increases, the rental scenario tends to get much worse, while the ownership scenario tends to look better.



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