Buying or Renting of a House

Another buy-or-lease alternative. You could buy the home for $300,000, putting 20% down and renting it out at $1400 a month. Which would make more sense? Renting or leasing the home? Explain your rationale

Buying or Renting

A lease is an agreement between the landlord and the tenant that gives the tenant the rights to live in a house for a fixed period of time usually more than 3 months. A rent is the amount of money a tenant is entitled to pay the landlord on monthly basis. Rental agreement is a month to month agreement. Buying a house will give the person the right to own the house and he or she will not be paying rents or lease.

In this case, we have two alternatives, either to buy the home or to lease/rent the house.

Buying the house

Buying the home will only cost $ 300, 000. The individual will have to pay 20% of $300, 000 which is $60,000 and pay the rest amount $240,000 latter. By doing this the individual will acquire all the rights to own this home and the landlord will not have any rights over it.

Renting the home

Renting a home by paying $1,400 a month. If the tenant continues to rent the home for an year, he or she will have spent $1,400* 12 which is $16, 800. It will take only 18 years for the tenant to have spent even more than $300, 000 that he or she could have spent to pay for the home and own it permanently.

In this case, I would go for buying the house. This is because in the long run, the cost of renting the home will be higher than that of buying the home. Also buying the home will give the person the rights to control the property and acquisition of the home is a capital gain. The pay down for the home is quite low thus the person will be able to pay. The buyer of the home also experiences personal freedom in that he or she can redecorate, remodel, or make improvements as they see fit.

Reference

De Leeuw, F. (1971) The demand for housing, A review of the cross-sectional evidence, Review of Economics and Statistics, vol. 53, no. 1, pp. 1–10.