There's a simple math rule that can determine if you should rent or buy a home, according to 2 early retirees who think buying a house to live in is a 'terrible' idea
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- Deciding to rent or buy a home comes down to the "Rule of 150," according to early retirees Kristy Shen and Bryce Leung, who wrote the book "Quit Like a Millionaire."
- Multiplying your monthly mortgage payment by 150% will show you how much your house will actually cost per month with all expenses, they said.
- If the resulting number is higher than your rent, keep renting. If it's lower, you should buy.
- However, early retiree Tanja Hester said renting versus buying really comes down to whether you value certainty or flexibility more.
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There are two groups of people: Those who would prefer to rent their home, and those who would prefer to buy.
How do you decide which group you belong to?
According to Kristy Shen and Bryce Leung, who retired at age 31 as millionaires and co-authored the book, "Quit Like a Millionaire," it comes down to the "Rule of 150."
Based on standard housing-related costs, Shen and Leung did the math and found that for the average American family, the cost of buying, owning, insuring, and selling a home equals the interest costs for a typical mortgage over a nine-year period (the length the average American family stays in their home, according to the US Census).
Based on these calculations, for the first nine years of a standard 30-year mortgage, around half of your total payment goes toward interest and the other half goes toward paying down the principal.
But to figure out if it makes sense to buy, you need to take the interest, add the extra costs of owning that home, and compare it to the rent you'd be saving. Enter the Rule of 150.
"Since the extra ownership costs are approximately equal to the interest of a typical mortgage over nine years, and the interest is approximately 50% of your mortgage payment during that time, you have to multiply your monthly mortgage payment by 150%," they wrote. "This is how much your house will actually cost per month, once all expenses are factored in."
If the Rule of 150 monthly cost is higher than your rent, keep renting. If it's lower, it's time to buy.
Renting or buy doesn't always boil down to math
However, Tanja Hester, who retired at 38, said that the issue of renting or buying a home isn't always a question of simple math.
In her book, "Work Optional: Retire Early the Non-Penny-Pinching Way," she said that it really comes down to whether you value certainty or flexibility more.
Buying a home can be an investment and offers the certainty of a fixed mortgage payment, but it also comes with a lot of unexpected costs - and it can take a while to build equity, she said. Renting is typically more affordable and flexible, and offers an opportunity to build greater savings, but gives residents less control over the property.
"The question of whether to rent or buy is also a highly personal one, not a simple math problem, with a number of variables such as what your local market dynamics are, which arrangement feels better to you, how attached you want to be to one place, how important it is to you to customize your space, and whether you want to tie up resources to save for a down payment rather than saving for another goal (like early retirement)," she wrote.