Todd Sinai is a
real-estate professor at the Wharton School at the University of
keep renting, or buy a home?
age-old dilemma nearly every American adult wrestles with at
some point. No one wants to throw their hard-earned cash away on
rent payments theyll never see again when they could be
investing in a home that will grow in value and potentially
provide a nice return one day.
If that line of thinking sounds familiar, Todd Sinai, a real-estate
professor at the Wharton School of the University of
Pennsylvania, would like to stop you right there.
A number of crucial factors go into the rent-versus-buy equation
calculators exist for
purpose — but a houses potential return on investment
shouldnt be your focus. In fact, you shouldnt think of it as an
investment at all, according to Sinai.
People get caught up in this notion of Oh, if I buy a house
its an investment, so I can do it at any time, but its not,
Sinai told Business Insider.
Housing is a consumption decision, not an investment decision,
Sinai said. The amount you pay for housing should comport with
your needs, goals, and budget, regardless of housing market
trends and potential growth in home value.
If what youre spending each month on housing jumps when you move
from renting to owning, thats not necessarily a wise financial
move just because youre getting equity. You need to make sure
the additional space and amenities youre consuming are
worthwhile expenditures on their own merits, not for the
theoretical payout they might afford later.
If you spend twice as much on a house, youre not making twice
as big an investment, youre spending twice as much on housing,
Sinai said. Thats a mistaken way to approach it.
Lets say you time your
local market correctly and home prices rise after you buy. If
you decide to sell that home, youll still need a place to live,
and youre buying in that same market with expensive home prices
unless you go back to renting.
Moreover, the process of buying and selling a house is expensive.
The taxes, fees, and closing costs youll pay when you buy and
sell that home eat into any profits you reap.
Buying that house cheap and selling it once its gotten
expensive is an expensive way to make money, because the round
trip [cost to you] is about 10%, so you take a huge hit, Sinai
If you want to make an investment in housing, Sinai says youre
better off doing it in the markets — such as buying shares in a
estate investment trust or an exchange-traded fund.
For buying your own home, just ensure it will match your needs
for many years to come, independent of what happens in the