To Rent or to Buy: The Million Dollar Question
Having to decide between buying or renting your next residence is a good problem to have. If you're in a position to make this decision, you've likely already made some good financial moves. But having the money to buy a home doesn't mean that it's the right time or the right choice to purchase a home. Likewise, renting can actually be more costly in the short and long run. The decision to buy or rent also depends on the housing market in your area, your lifestyle and future plans. Consider the pros and cons of renting and buying before you decide on a place to hang your hat.
Renting Pro: It's Usually Cheaper on a Monthly Basis
Renting is less expensive than owning in nearly every city. According to CNBC, owning a home is 54 percent more expensive than renting. One housing-cost survey found that the median U.S. rent in 2015 was $959. In a separate survey, the median total housing cost for a mortgaged home was $1,492. The difference in monthly payment is due to the total of fees that come with ownership, namely, mortgage principal, interest, property taxes and hazard insurance.
As a renter, you enjoy one fixed monthly fee for the life of your lease. In a homeowners association, you also pay HOA fees, and if you take out a second mortgage, the principal and interest for the second loan adds to your monthly housing cost.
Renters don't experience the same fluctuations in monthly or annual costs that sellers do. A mortgage's interest rate can rise if the loan is an adjustable-rate mortgage. If you filed a claim on your hazard insurance, your insurance premiums would then go up. And if your HOA raises fees or the city increases its property tax rates, you foot the bill as an owner, but not as a renter.
Owners also face hefty, often unpredictable repairs, such as a new roof or plumbing work. For a home in average condition, annual maintenance costs range between one percent and four percent of the purchase price. As a renter, you can just call your landlord or property manager to come take care of the problem at no additional charge.
Renting Con: It's Pricier in Certain Cities
Renting is actually more expensive than buying in some cities, especially in the South and Midwest areas of the country. In these areas, a low cost of living along with favorable housing markets makes buying and owning a home less expensive than renting.
According to a 2017 survey by financial website SmartAsset, it was cheaper to buy a $200,000 home, assuming the buyer had a 20 percent down payment and a modest interest rate of 4.5 percent. In the top 10 cities where the housing markets favored homebuying, rents exceeded mortgage principal and interest payments by two to three times.
Buying Pro: A Sense of Stability and Permanence
If your life requires more stability and you don't plan to make big job or family moves within the next five years, buying may be beneficial. Less than 40 percent of people under the age of 35 own their homes and over 60 percent of people over 35 own. Compare those figures to more than 80 percent of people over 65 years of age who own their homes, and it's easy to see that millenials put down roots far less than older folks. Life changes, such as marriage, starting a family, and gaining employment stability, also tend to come later in life, and make buying easier and desirable for people in the 35-and-up category.
Buying Con: It's Pretty Permanent
Buying requires a lot more commitment than renting. The best mortgage payments come with 30-year repayment terms and getting out of a mortgage requires a refinance or home sale to pay off the debt. That means a major change in family or economic circumstances, such as job loss, divorce or an increase in family size can make your mortgage unaffordable or your home no longer suitable. Selling a home is expensive and the market may not favor selling exactly when you need to do it, leaving you to take a financial loss or a major hit to your credit if you can't pay the mortgage and you go through bankruptcy or foreclosure.
Renting Pro: Less Responsibility
Calling on a landlord to make repairs is one of the major perks of renting. No matter how big the problem, in most cases, it's up to the landlord to maintain the property and make repairs. Unless you neglectfully or willfully damage a rental, the homeowner foots the bill and arranges repairs. This makes rental life a lot less stressful and costly than homeownership.
Landlord-tenant laws, which vary by state and town, protect tenants when it comes to property condition, making landlords responsible for keeping the property up to par and addressing repairs in a timely manner. A rental has to be habitable and safe to live in. For example, property owners have to install smoke detectors, and remove mold or lead-based paint from a rental property. They also have to fix leaks and repair or replace broken appliances.
As a renter, you can also purchase renter's insurance to protect your belongings in the case of fire, flooding or theft. Insurance can also pay for your housing costs if you have to move out of a property due to severe damage.
Renting Con: Less Control, Freedom and Privacy
Because landlords take care of maintenance and repairs for you, you may have to wait longer than you'd like for things to get fixed. You also don't have a say in modifications made to the rental, such as the brand of appliances, the color of the new carpet or paint, or aesthetic appeal of the new cabinets or flooring that gets installed.
Your landlord can also prevent you from painting a property, adding fixtures, or having pets or long-term guests. Also, landlords have the right to enter your rental with proper notice, terminate the lease with proper notice, and increase the rent or change rules when your rental agreement expires. Landlords typically will also run in-depth credit and background checks before renting to you.
Buying Pro: A Savvy Financial Investment
Real estate is one of the main ways to build wealth over time. The caveats are that you have to be able to afford your home. You also have to pay down your mortgage to build equity. Increases in home values can also help you gain equity, but because housing markets experience unpredictable shifts, you can't rely solely on home value appreciation to make a profit.
Buying is a good idea if you believe you're going to be in a house for at least five years. After that, most homeowners hit the "break-even point," where they can sell their home at a profit by paying off their mortgage, paying all selling costs, recouping their initial down payment and closing costs, and walking away with money leftover from the sale. If you don't plan to stick with a house for at least five years, most experts suggest renting.
Buying Con: The Housing Market Changes
Homeowners in the 1990s and early 2000s who felt the market downturn the hardest might be the first to reconsider home ownership. When home values dip below what you own on a home, you have no way to sell a home to break even, getting out means filing for bankruptcy, losing the home in foreclosure, surrendering the home to the lender, or selling the home for less than you owe in a short sale, all of which drastically hurt your credit and short-term ability to buy again, obtain credit anywhere, and even rent.
- CNBC: 10 US Cities Where It's Cheaper to Buy A Home Than Rent
- Forbes.com: Home Maintenance - The Cost Buyers Can't Afford To Ignore
- U.S. News & World Report: Renting vs. Buying: Which Is Smarter?
- Department of Numbers: US Residential Rent and Rental Statistics
- CNBC: Here's How Much More It Costs to Own vs. Rent a Home In Every State
- Internal Revenue Service. "Publication 936: Home Mortgage Interest Deduction." Accessed June 25, 2020.
- Internal Revenue Service. "Topic No. 503 Deductible Taxes." Accessed June 25, 2020.
- American Financing. "Does Your Mortgage Retire With You?" Accessed June 25, 2020.
- Trulia.com. "Best Places for Retirees to Rent or Buy." Accessed June 25, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.