Given the large upfront costs that come with the purchase of a home, most young people begin their independent lives renting an apartment, or more and more so move back in with their parents. As they finish college or trade school and go on to start their careers, save money, and start families, many choose to buy a home. On the other end of the age spectrum, homeowners nearing retirement may choose to sell their family homes, downsize, and become renters once more.
Regardless of the big-picture economic forces that affect homeownership rates, determining whether and when to purchase a home is a personal choice that demands careful consideration and planning. This decision varies from market to market – what makes sense in small town, USA might not work in San Diego or NYC and vice versa. Also, because American culture idealizes homeownership to a certain extent, emotional and social pressures can affect the decision almost as much as financial concerns.
Are you a renter interested in buying a home, or a homeowner wondering whether renting makes more sense at this point in your life? It’s time to evaluate the relative costs, benefits, and drawbacks of owning versus renting your home.
There’s no doubt that buying a home is a major life decision, but is it right for you? Of course, there’s no singular correct answer as there are pros and cons to both renting and buying. A major factor in anyone’s decision-making process comes down to finances. In most cases, renting seems to be the more affordable option.
However, that’s not always the case. Your decision can boil down to several lifestyle considerations such as whether you want flexibility or stability, what your career goals are and whether you want a place to truly call your own.
Read on to find out what you need to consider before deciding to rent or own your next home. Let’s first start with a list a Pros and Cons:
Renting Pros And Cons
- Mobility/freedom to move around
- Landlord pays for maintenance
- Doesn’t require expensive closing costs
- No fluctuation in monthly housing expenses
- Allows you to test-drive different living spaces
- You don’t build any equity
- Limited ability to customize your living space
- Rent could go up over time
- Landlord might sell or decide to stop renting
- Limited sense of home stability/permanence
Buying Pros And Cons
- You build equity over time
- Home value may increase over time
- You may reap tax benefits
- Unlimited freedom to customize your living space
- Sense of home stability/permanence
- Closing costs can be prohibitive
- Responsibility for maintenance and repairs which requires time and effort
- Less flexibility to move (at greater difficulty/expense)
- Home value may decrease
- Recent tax laws could hamper tax benefits
Rent Vs. Buy: How To Decide
1. How Long Do You Plan To Live In The Same Place?
In other words, are you planning on putting down roots raising your family and growing into the local community for a many years to come or do you desire more flexibility in where you live?
If you feel certain you’ll stay in a home for at least 5 years, buying a home can really start to make sense. This is because it could be both a good fit financially and emotionally – you can tailor it to your personal liking and really make it feel like it’s yours, like HOME.
On the other hand, renting is the better option if you move more often, such as in the military or you’re open to new jobs and opportunities all over the country. For example, let’s say you’re really hoping to get that job promotion but it’s halfway across the country. You may not want to have to deal with the hassle of selling a home while transitioning to a new position. Or perhaps you’ve moved to a new area and renting would give you some time to get to know the area and different neighborhoods before settling down somewhere.
Sure, you can buy a home and then sell it within a few years, but the costs are hardly worth it. Aside from initial closing and moving costs, you may be paying more closing costs when selling a home in addition to other costs such as repairs and renovations that would make the house sell for top dollar. Lastly you’re assuming your home will appreciate and that by no means is a guarantee.
2. Estimating The Cost Of Renting Vs. Buying
In many cases, renting can be cheaper than buying a home because of the upfront costs involved. This includes a down payment, closing costs, moving costs, any renovations and other home maintenance tasks.
With that said, just because you can afford a mortgage payment doesn’t mean you can afford a home; all the other expenses of home ownership add up. In addition to a monthly payment that’s more than the principal and interest on your mortgage, you’ll also have property taxes, homeowners insurance and (in some cases) mortgage insurance as well as homeowners association fees.
On the other hand, buying a home can be cheaper in the long run and it offers you an opportunity to build equity. In most areas of the U.S. buying a home is actually cheaper according to a ATTOM Data Solutions report that shows that renting is more affordable than buying a home in 69 percent of the counties in the report that have a population of at least 500,000 or more.
Not only that, but there are tax savings to being a homeowner. (Though with the recent tax changes there may be limits as to how much mortgage interest, state and local property taxes you can write off). As always contact your accountant or financial expert for up to date tax advice for your personal situation.
That’s not to say you should dive right into home ownership. It’s completely fine to rent for a few years, save up and purchase a home if you’re dead set on having a place of your own. The savings in costs of being a homeowner also assume you’ll stay in a home for the long term and may not factor in maintenance costs. However, if you do pay off your mortgage and continue to live in the home, the savings can be significantly cheaper even with home maintenance costs.
3. Mobility Vs. Putting Down Roots: Which Is More Important To You?
Look, life happens. Even with the best of intentions it’s hard to predict what can happen next. If you intend to stay in one place for a long time and have the financial means to do so, buying a home may make the most sense.
However, it’s important to take a look at your current life situation and think about whether or not it’ll change within the next few years. Because if it does, your housing needs could also change.
For example, you and your long-term partner may have just gotten engaged and plan on getting married in the next 2 years. In this case, buying may not make sense because you two want to figure out how to combine your finances and work out your budgeting routine before adding a home into the mix.
Or let’s say you and your spouse just got married and you aren’t sure if you want to start a family quite yet. If you have any inklings that you might want to have children soon, you shouldn’t buy a home that’s not going to accommodate a growing family in a few years.
In both these cases, it might be a good idea to rent for the time being so you have time to figure out what you want in a home, what your budgeting needs are and what kind of home might be the best fit for the lifestyle you hope to have in the future.
4. Weigh The Risks
As mentioned above, there are risks for both renting or buying a home. Although you can build equity when buying a home, there are some financial risks. For one, you could lose money if there’s a downturn in your local real estate market (Here is more info on housing market cycles, Biggerpocket.com). Or, if you sell your home sooner than you want, you may not be able to make up for what you spent in closing costs or renovations.
Let’s not forget maintenance costs. These are expenses you’ll need to pay to keep the home in top condition. Think checking air filters and vents, testing fire alarms, landscaping, fixing plumbing issues, among other things. There’s always something that comes up that needs fixing.
If you’re focused on other things in your life like a career that requires you to travel often or you have multiple young children to attend to, adding home maintenance to your list of responsibilities may not be a top priority to you.
On the flip side, renting means you won’t have the opportunity to build equity like you would with buying. Your rent could go up at any given moment. You’re also at the mercy of your landlord, such as being asked to move out or having to deal with maintenance requests being deferred.
5. Assess Your Financial Situation
It’s important to note that you need to be realistic about your financial situation when deciding between renting and buying. Once you estimate the costs of renting versus buying, be honest about whether you can afford other upfront costs like a down payment, repairs, moving costs and buying new furniture. Consider using a mortgage calculator to estimate your monthly payments as well as how much home you can afford.
Consider these questions:
- Do you plan on having children? Do you know where you want to raise them or where you want them to go to school? What is the home-buying landscape like there?
- Do you see yourself changing jobs in a few years or are you committed to your city for the foreseeable future?
- Are you prepared to trade your weekends of leisure — biking, hitting breweries, brunching — for fixing sinks and mowing the lawn? Because that’s what homeowners do. Signing closing papers is the wedding, move-in day is the honeymoon, and homeownership is the actual marriage. There will be work and rough days, and it’s not as easy to bail if things get really bad like when you were “dating” a rental home.
- What is it about owning a home that appeals to you? Is it having a physical place to make your own, to really invest in personally, not just financially? On the flip side, are you mostly looking to make a financial investment? Is it just a status thing? Do you feel like you should buy a home at this point in your life? Where is that urgency coming from?
The most important thing to remember is that buying a home isn’t the be-all-end-all of financial adulthood. Renting is not inherently a sign of an immature financial life. For a lot of people, renting could totally be the best move, at least for a period of time. And that’s okay.
In either case, do some careful budgeting right now so no matter what you choose you’ll be able to afford a home or rent.
Rent Vs. Buy: Final Thoughts
There isn’t always a clear answer to the question of whether to rent or buy. Depending on your life situation and finances, the answer might change over time. There are other options such as rent-to-own property where you start out renting then move onto becoming a homeowner. No matter what decision you make, it’s crucial you make an informed decision based on your financial situation and lifestyle.
This matters too. When it comes down to it, if the cold numbers still leave you a little on the fence, but emotionally you are honestly in love with the idea of truly owning a home, then go with that. When it comes to home buying, let your logic clear a path for your emotional fulfillment. A home isn’t just a thing you own — it’s a place you live your life. It’s more okay to weigh your feelings as heavily as you want.
Smartassest.com has a handy calculator that weighs the known costs (both financial and time) associated with renting and buying. Although this calculator can help you decide what makes the most financial sense in a particular situation, it can’t help you evaluate all the subjective, non-financial factors that affect your ultimate decision. Only you and your loved ones can make the final choice, so as you work toward an ultimate decision, keep an open mind. Remember that it’s better to wait and make the right call than rush into a choice you come to regret.
Are you deciding whether to rent or buy your home? Let us know in the comments below.