Should I buy instead of rent?

I am often asked the question, “When should I buy a home?” My answer is, “at the age you are financially mature enough to do so.” 

There are three ways home ownership creates wealth.

1. Cash flow difference. Buying a home is actually cheaper than renting in terms of monthly cash flow because, in this example, over nine years, monthly rent is higher than monthly housing expenses (insurance, taxes, and monthly principal and interest payment). That may not always be the case, but with rates where they’re at right now, it is true.

2. Amortization gain. Like a forced savings, with every payment you make some goes to equity. Using this example, in nine years you paid $43,698 towards your principal. That is your equity in the property. When you sell, you get this back.

3. Compounding amortization. Everyone knows your home can increase in value, but amortization compounds just like any other investment. For example, if you have 100k home that appreciates 3% in year one, the next year (year 2) your home is worth $103,000. Let’s say on year 3, appreciation increases another 3%, your home’s new value is now $106,000 (103k x 1.03). This is the reason why the younger you are when you buy, the greater chance you have at wealth with home ownership because of compounding appreciation. This is the reason I recommend buying as young as you can.
In the example we’ve been looking at, with compounding appreciation you gained $63,691. If you owned the home nine years vs renting over that same time period, with home ownership you would have gained $95,367 in net worth from this example.