First, let’s answer the easy questions. Is it actually cheaper to buy than to rent? In that case, the answer is yes.

Are you going to move in 2 years or less? Then, no.

Now let’s talk about all the situations in between.

Are homes a good investment? Most of the time, believe it or not, the answer is no. Over the long run, the average home, after adjusting for inflation, only goes up by about 0.4% per year.

Why don’t people realize this? Mostly, because they are not considering the effect of inflation. Or, they don’t include taxes, maintenance and repairs. They might not include closing costs (which can be 5% of the home’s value) in the cost of buying the home.

And when they compare their home to other investments, they often forget that the down payment could have been invested in something else. When you put down that initial payment, you lose all the interest or dividends that you would have gotten had you invested the money instead of buying a home.

On the other hand, homes can be seen as a method of “forced savings”. You have to live somewhere. And if your money is going to rent, you’ll never see it again. But as a buyer, when your money finally starts going towards the principle and not the interest, you are actually paying yourself. So sure, as an investment, the home won’t make much. But since owning will force you to save, at least you will be saving, which many people won’t do otherwise.

Further, there is a huge tax benefit to owning a home, and believe it or not, it’s not the mortgage deduction. The biggest benefit is that when you sell, if you have gains, most or all of those gains will be exempt from taxation. 250k for a single person or 500k for a married couple. So even though your investment might not increase as much in value, you won’t be taxed on the increase. That’s a big deal.

So does it make financial sense to buy?

Let’s be honest. Most of you will either be home owners or not, for reasons that have little to do with the financial math. And each situation is so different because a house is not a diversified investment. But here are a few things to consider.

Your mortgage and real estate taxes should never exceed 28% of your gross monthly income. Remember, things break. Things wear out. If your mortgage is higher than 28% of your gross income, you are going to struggle to maintain your home.

Your home is an illiquid, risky investment with low expected returns. But, you have to live somewhere. And if you live in your home long enough, your cost of living drops dramatically when the mortgage gets paid off. Ask any retiree how important that is.

The choice to buy or rent is separate from the choice, “Should I consume as much house as I can afford?” You can consume too much by renting just as easily as you can consume too much by owning. And if you spend too much on your car or house, none of the other stuff will matter. The issue with home buying is that people “fall in love”, and that’s how the biggest mistakes get made. You very rarely “fall in love” with a place you’re renting.

So watch out for that emotional mistake. The emotional stress of trying to pay for a house you cannot afford is absolutely not worth it.

For me, home ownership has been truly liberating, one of the greatest experiences of my life. But I waited years to buy, waited out a massive housing bubble, waited until I could get exactly the place I wanted, got a place that actually reduced my commute, bought a house that slightly reduced my overall living expenses, and bought the house that I hope to die in. So yeah, it’s been great for me.

And this is the final thing I want to impress on you. Timing matters as much as location. So pay attention to whether the cost of renting in your area is rising faster than the cost of owning. If the cost of renting is rising faster, that’s a strong signal that you should buy a home. On the other hand, if the cost of owning is rising rapidly, that’s a signal that you might be in a nasty housing bubble. Watch out.