Thursday, June 21, 2007

Buying a House vs. Renting in Your 20's

This is the fourth article in my personal finance in your 20's series. In the past few days, I have covered investing, career and insurance for people in their twenties. Today, I wanted to discuss the big real estate question: should you buy a house in your twenties?

Many people consider owning a home the epitome of financial success and stability. I have a different point of view. Buying a house is not always a good idea and is frequently not a good investment. A house is a large, undiversified investment, it is not liquid and there are big opportunity costs for all the money you sink into brick and mortar. However, all of these points are not unique to individuals in their 20's.

In my opinion there are four factors that make buying a house less attractive specifically for people in their 20's:

1. A House Ties You Down - in your 20's, you want to keep yourself open to opportunity. You never know where life, career, love or family may take you. A house slows you down and ties you up.

2. Lower Tax Benefits - in your 20's your income is typically lower than it will be further on in your career. For people in higher tax brackets, the mortgage interest deduction can mean big savings, however if your federal tax rate is 10% or so, you are not really getting a big tax break.

3. You Will Need to Move Soon - if buying a house makes financial sense, it makes sense after several years of owning the same place. If are buying a house in your twenties, you are probably buying a house that will not be sufficient to meet your future needs. The house you buy as a bachelor or married couple without children is not the same house you would buy as a parent of two (or three...). If you have to move in only a few years, there is a good chance you will take a financial hit.

4. Do You Really Need More Debt? - many people in their 20's are fully loaded with student loans, credit card debt, car payments and so forth. Do you really need more debt to weigh you down? In my opinion, in your twenties you want to keep yourself as free of obligations as possible, so if the mood strikes you can head out on a three week tour of South Korea. Worrying about the mortgage does not improve your chances for such adventures.

Anyway, call me biased, but in my opinion, until you get married and decide to start a family, owning a house does not make a lot of sense, from either an economic perspective or from a lifestyle perspective.


plonkee said...

But, what about those people that don't get married and don't have (or want) children. Should they never buy a house?

I basically agree with you, I tihnk you're saying that buying a house is counter-productive if you aren't ready to settle down.

Shadox said...

Exactly. It's not about getting married or even about your age really. It is about only buying a house if you plan to live in it for a while.

Generally speaking, people in the twenties are less likely to remain in the same house for a long period of time and hence are more likely to take a financial hit if they decide to buy.

Anonymous said...

It looks like this article was writtin a while ago, but I'm going to have to completely disagree. I bought my first house when I was 19. I bought a 4 bedroom foreclosure. I moved in then rented the other 3 rooms. The 3roommates paid the mortgage. I'm 20 now and just bought my second house. I'm renting my room in the old house which pays half the mortgage on the new 2 bedroom house. I rent out the other room which covers the rest of the mortgage. So I own two houses that pay for themselves. Buying a house in your 20's can me smart if you think of it as a way to make money and not a place to live.

Shadox said...

Sounds like you have a plan that is working out for you, and I don't doubt that this is a viable strategy if indeed you can rent out the other rooms in your house (and don't mind sharing the place). I don't think that the same strategy would work if you had a wife and kids.

Good for you!

Anonymous said...

I have to agree with anonymous.. I am 22 and purchased my first home at the beginning of the year. I dont see any reason why someone shouldnt pursue buying a property if they are financially equipped to do so. I make a good living for someone in my twenties and could afford to purchase a home rather then pay almost the same amount of money in rent( and pay someone elses mortgage) If the opportunity is there than maximize...

Pia @ Philippines properties said...

For me, in this housing market, it makes more sense to buy a home than to rent one. The advantage of buying a home is clear on people who are thinking of long term investment, owning their own place allows them to personalise their property. Anyway, thanks for sharing this post.

Buy to let mortgage advice said...

For me buying a house is cheaper than renting though there are some requirements that should I consider in buying a house but when it comes in financial issue I don't need to get worry because I have a home loan.