To buy or to rent? That is the crucial housing question.

Not long ago, many people would have favored buying. But since the bursting of the real-estate bubble, an event that saw millions of homes plunge in price, folks have grown more cautious.

Indeed, if the real-estate market collapse has a lesson to teach us, it is this: Buying a home should be considered a long-term investment—and if you don’t have a long time horizon, you should probably rent.

Scanning the horizon

If you’re a first-time buyer looking to finance a home purchase mostly with borrowed money, you may find that the prospective mortgage payments aren’t that different from what you currently pay in rent. That can make buying seem attractive.

That means that, before buying, you want to be reasonably confident you have sufficient time to build up some equity, either through price appreciation or by paying down any mortgage. With any luck, you will accumulate enough home equity to offset any softness in real-estate prices and also the cost of buying and later selling the house. Those costs include hiring a home inspector, title insurance, mortgage-application costs, legal fees and, maybe most important, the 5% or 6% commission you might pay when selling your home.

Those monthly mortgage payments, however, shouldn’t be your only worry. You also need to consider your chances of amassing some home equity during the time you own the house. Therein lies the problem: Not only is there a risk that property prices could decline, but also buying and especially selling real estate can be hugely expensive.
 
The hope, of course, is that a hot property market will banish such concerns. But on that score, you shouldn’t be too optimistic. While home prices posted impressive annual gains during the housing bubble, the longer-term historical averages are quite modest—barely ahead of inflation, in fact. With that in mind, before you buy, you probably want to be reasonably confident you will keep a house for at least five years and preferably seven years or more.

Don’t just think about time horizon, however. Also give some thought to your job security and the stability of your income. If there’s a risk you could be laid off, buying a home probably isn’t a smart move unless you have significant savings to fall back on. Even if you’re unlikely to lose your job, you may be asked to relocate to another city. If you have to sell a year or two after buying, there’s a significant risk you will lose money after all costs are figured in.

“There’s another reason you might rent: Perhaps you can’t currently afford the home you would be happy owning for the long haul.”

Biding your time
 

 

In fact, for many people, there are strong arguments for renting. While you don’t build up home equity, you typically also don’t have to deal with the cost and hassle of home maintenance and yard care.

In addition, you don’t have to pay property taxes or insurance, except renter’s insurance for your personal possessions. On top of all this, renting doesn’t tie up money that you would otherwise use for a down payment.

As a renter, when you move, you don’t have to worry about big transactions costs. Yes, you might pay moving costs and your new landlord may want the first and last month’s rent upfront, plus a security deposit. But these expenses will almost always be less than the cost of buying and selling.

Indeed, the ease of moving is one of the key benefits of renting—and it may appeal to more than just those early in their career. Retirees might rent so they can give a new community a one-year trial before committing to buy a house. There are also many rental communities geared to seniors that provide recreation and perhaps on-site dining facilities.

To be sure, as a tenant, you face the risk of rent increases. But if you owned your home, your bills for property taxes, homeowner’s insurance and utilities would likely increase periodically as well, and you also face the risk of shelling out large sums for major home repairs.

There’s another reason you might rent: Perhaps you can’t currently afford the home you would be happy owning for the long haul. If you buy a home and quickly sell because you’re dissatisfied, it could be a costly blunder.

By continuing to rent, you will have time to amass more money for a house down payment. That may allow you to buy a larger home and possibly put down 20%, bypassing the need to take out private mortgage insurance. While you’re waiting to buy, you may also see your income rise. That, too, should allow you to purchase a more expensive home.
 
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