We are all very confused on the issues of renting vs owning and we all just want to know which is better and which is not.
Well owning has its own amazing benefits but renting is better as it makes your trained for the own stuffed you will want to have in near future.
Although we are always confused in the idea of choosing between renting and owning we always consider the purchasing value but we never think that if we really need the stuff that we are going to buy.
We are very much sure that reading the below article will help you in understanding the renting vs owning factor much better.
Renting Vs Owning the better option
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| Renting Vs Owning |
As you all keep searching on the internet that if I should I own or rent and is renting a waste of my money, we give you your answer that renting is much better than premature owning and buying stuff.
Your mind is always confused between the renting vs owning choice and this confusion either makes you loose money or waste money.
Consider this if you buy a new house, car or any other thing and you don't know anything about the maintenance of these things and you end up selling these things for a lower bitter price or you are bearing high maintenance cost than you will think that renting would have been better first.
When Renting Rather Than Owning Makes Sense
For the high cost homes and rich lavish cars, it generally makes more financial sense to buy them rather than rent them—over the long haul.
Many of the typical rent-to-own programs help families double or triple the amount of money they need to spend on a computers, furniture, televisions and other home furnishing.
Saving money and purchasing for cash your computers, furniture and televisions is much wiser than using a rent to own program. But sometimes you can sense that in the battle of renting vs owning, renting makes sense.
Here are some of the most common examples.
1) Boats: Unless you live at a place where you can boat every week and you’re sure you will boat regularly, it makes a lot of sense to rent a boat for a day or a week every year rather than foolishly buying a boat to display proudly in your driveway 340 days each year.
2) Motor homes: Unless you are going to live in your new awesome motor home you should definitely think about renting vs owning one for your vacation rather than foolishly buying one and parking it for all but a few weeks each year to show off.
3) ATVs: Unless you live in a rural area where you can ride your ATV almost every day, it makes more sense to renting them once or twice a year for a weekend than to have them filling the garage.
4) Renting Vs Buying condos and hotel rooms: For most people with average middle class incomes, it makes much more sense to rent a few nights in a hotel or a vacation condo than to buy a time share. Those who have purchased and enjoyed time shares are majorly folks with the money and time to travel extensively and take advantage of all of the expensive privileges. For the rest who struggle with finances, it’s simply wiser to rent a few nights here and there.
So now you know in the confusion between renting vs owning it is sometimes better to rent things rather the own them and earn a lifetime liability.
Renting VS Owning Decision
lets look at the Renting Vs Owning decision that we all get confused with.
There are two basic rules that can guide you in making your rent v. buy decision. You may more reasonably consider about a thumb rule of purchase if either of these conditions is true.
1) The Frequent usage Rule : If you reasonably plan to use an item very frequently, the way you use your living home, your self-owned car and your favorite socks, buying is likely much cheaper per use and much much cheaper than renting each time.
If you will only use it on a timely purpose or occasionally, you may be better off renting in the game of renting vs owning. To find out, rent it for some time before you decide to buy to make sure you want it and will use it as much as you hope.
2) The Appreciation Vs Depreciation Rule: If the thing you’d like to own and buy is reasonably likely to appreciate over time and give you some good returns, like a condo on the beach in Hawaii, it makes more sense to buy it than if it will depreciate like a car.
May be you may only visit your condo in Hawaii once a year, but if it is going up in value and not costing a hell lot when you’re not there but you have the resources to buy it for cash money it is hard to argue against the purchase.
Owning the beneficial stuff provides a certain satisfaction. We’re proud of the things that we own. But there are some things that it makes absolutely no sense to own.
We can rent them instead and save thousands of dollars by renting each year that we can use to buy things that it would actually make sense to buy.
So a Rich Dad advice for you is understand the base value of things and then decide on renting vs buying as buying stuff that brings more money in your pocket is good and renting things that are of no profit and are just taking money out of your pocket is better thing to do.
Learn about owning a KFC franchise click here.
Smart money spending tips click here.
Buying Vs Renting a House Tips and Explanation
Although we have tried our best to make you understand all about renting vs owning choice, we also want to give you more insight on the value of renting.
There is a basic similar analysis a couple of years back on the theme base question of “Renting vs Buying” house.
Many of the common people don’t understand the main effect of compounding, even if they are good in maths. The reason being that doing compounding in your head isn’t actually very logical and intuitive. And humans dislike any kind of non-intuitive reasoning unless they are very explicitly explained about it. Read “Thinking Fast, Thinking Slow” by the Noble laureate Daniel Kanheman for getting some insights on this matter.
Just know that a stock amount of hundredfold increase over 30 years means 16.6% growth compounded annually. And if you look at Sensex, it has grown from 100 in 1980 to 30,000 today which corresponds to 17.1% growth annually. And there are mainly around 1.5% to 2% dividends as well, making the overall long term return to 19%.
The reason, I’ve pitched it like this is to push the reader to start the base thinking in annualized percentages. Just keep in mind that equity market gave an actual 19% return historically, which means the monthly return is roughly around 1.5%.
So whether to Buy or Rent and what to choose in the renting vs owning confusion?
Here is a good formula.
Let’s say,
A = cost of owning and renting asset (i.e. your home)
f = down payment fraction (usually 20% i.e. 0.2). That is, you pay 20% of the cost upfront.
N = no. of months of installments. So for a thirty-year loan N would be 30*12 = 360.
i = the amount of base interest rate on your home loan (typically 10%). Remember that the loan is on the amount not paid as the actual down-payment. So if your home costs in total of around 500,000$and you paid a total sum of 100,000$ as down payment, then the remaining loan would be around 400,000$ lacs.
n = monthly rent as a fraction of home price. So if the base home costs 500,000$ and a similar home is available for rent at a base cost of 10,000$ pm then n will be 10,000/50,000,00 = 0.002 which is also a very typical number.
D = the overall monthly rate of return on your investments, if you had put your money in some stocks/MFs instead of EMIs on home loan. Conservative values are around 1% monthly (i.e. 12% annually). Historically, over long term the returns on stock market have been 1.5% monthly (including dividends). We will see how this small change turns the table against buying home.
R = increase in home rent every year (usually 5% annually which is same as 0.4% monthly).
F = your final corpus had you gone for investments through MFs or stocks. Please note that there is no change in your money outflow. Whatever you would put in your home (down-payment and EMIs) is now being put into stocks/MFs.
So it’s a good idea to see (F/A) ratio for typical values of f,i,n,D and R . The (F/A) ratio measures how many times your overall asset would’ve grown had you not bought the lavish over costly home. For instance, if you didn’t buy the home today for the base cost of 500,000$ but chose to invest instead and 30 years later the investment grew to 1000000$ , then (F/A) would be 10000000 / 5000000, i.e. 20. Over the term of 30 years, it means a total value return of 10.5%. So if you anticipate the value of your home to grow at least around a normal of twenty fold then buying a home will be very profitable.
With some basic mathematical analysis, one can come to the conclusion that:
FA=f⋅DN+(1−f)⋅(IN+1−IN)IN−1⋅DN−1D−1−n⋅DN−RND−R
where I=1+i1200
Let’s assume all the main and concrete typical values of f=0.2 (20% down-payment), n=0.002 (monthly rent is 0.2% of the cost of house), N=360 (30 years of loan), i =9 %, R =1.004 (i.e. 0.4% monthly increase in rent) and D =1.01 (i.e. 1% monthly return on investments). With these base values, the (F/A) ratio turns out to be a result of number 19. Meaning, if you are in a state of thinking that your home will appreciate in value at least around 19 times in 30 years, then you should buy a home, otherwise just don’t.
Now, let’s make the monthly return on your overall base investments to be around of 1.5% (i.e. D=1.015 ). This is a bit more realistic assumption over long term. Then, (F/A) ratio becomes a total in count number of 95.5. This is extremely impressive returns. This means that if you today choose to not buy your dream home worth 500,00$$ and invest the amount in some healthy good paying stocks, your corpus after 30 years would be 10000000$. There is no way your house is going to be worth that much money in a period of 30 years.
Below are some of the main value basic points to illustrate the sensitivity of various parameters like rent fraction ( n ), overall down payment fraction ( f ), the percentage of interest rate ( i ) and overall rent increment percentage ( R ).
A higher value of base of n means that you are paying a very high rent as compared to the overall price of the house.
When you pay a very solid and very large amount as down payment. Does it change things ? The more down-payment you pay, the worse the case for renting the housing becomes. Although the impact isn’t very severe.
What if the overall loan rate changes ?
A higher base value of interest rate makes your EMIs higher and hence worsens the case for buying a house.
Finally, the impact of different values of annual rent increments. Higher the rent, lesser is the value of over all wealth available with you to invest.
Use this base R-Code:
You can check for yourself using different parameter values here: R-Fiddle
# monthly installment on a loan of A for the overall total of N months at annual rate i (in %)
installment = function(i, A, N) {
I = 1 + (i/1200);
A * (I-1) * (I^N) / (I^N - 1);
# i (in %) is the overall interest rate (annual) on your home loan
rent_buy = function(f, D, N, i, R, n) {
y = f*(D^N);
y = y + installment(i, 1-f, N) * (D^N-1)/(D-1);
y = y - n * (D^N - R^N)/(D-R);
y
We also have to consider some base factor values like taxation, depreciation and hike in the base value which will ultimately define your overall base value of renting vs buying end profit.
So now you have a good understanding of renting vs owning game and you can choose one of them accordingly via the use of your wit.
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