Are you better off renting vs. buying a house? If you are weighing those choices, it could mean that your life is shifting in a major way, and you need a place to land on your feet. Or maybe you keep hearing about the red-hot housing market and wonder how you can make the most of it.
You should do the math before you decide, but the answer won’t come from a calculator alone. Whether you choose a house or an apartment, you want to feel good when you pull up to it at the end of the day. That’s not simply a money matter. Here are some things to consider as you make a life-changing decision.
Certainly not. (Unless you rent a place and never move in.) People sometimes say this because renting does not build equity. Paying rent, however, puts a roof over your head and gives you a place to keep your stuff.
Besides, owning a house does not guarantee that you are building equity. The house could go down in value. If you are renting and feel that you are wasting your money, you should consider a better rental fit or homeownership.
Renting offers much more than a fallback position for people who can't afford to buy a house and pay a mortgage. Read on to find out some of the joys of renting vs. owning.
The down payment, closing costs, taxes, and associated fees for a home purchase run much higher than the security deposit on a rental property, which is usually one month’s rent.
For example, a 20 percent down payment on a $250,000 house is $50,000, and the closing costs would be around $7,500. The security deposit on a $2,000 a month apartment would be $2,000.
First-time buyers, in particular, will run up some bills getting started. They can easily spend thousands of dollars on sofas, chairs, lawnmowers, weed-whackers, refrigerators, clothes washers and dryers, shovels, rakes, power drills, and gas grills.
Renter insurance tends to be much less than homeowner insurance, averaging $187 a year nationwide compared with $1,083 a year for home insurance.
Renters avoid real estate taxes, private mortgage insurance, home association fees, and similar monthly costs.
Odds are, an apartment will be smaller than a house, so the utilities costs should be lower. They might even be included in the monthly rent.
Renters don’t have to deal with nasty surprises like the need to spend thousands of dollars to buy a new HVAC system on an August weekend. They don’t have to figure out how to budget for major expenses like a new roof.
Nor do they have to replace worn-out carpeting, wallpaper, siding, bathroom fixtures, shower stalls, and other things around the house.
Not only do renters avoid those upkeep expenses, but they also avoid the work that goes with them. They don’t have to spend time running that lawnmower or weed-whacker. There is no need to rake leaves, shovel snow, or fix broken appliances.
Renters can head off for extended trips without worrying about upkeep. In fact, it’s much easier to move away from a rental than it is to sell a house.
Renters also don’t have to worry about whether their neighborhood is going downhill or losing value. They can move away when their lease is up.
Because of the high initial costs associated with home buying, renting can give people a better chance to get into more desirable neighborhoods. In places where homes are priced out of reach, people can make trade-offs on elements like living space and amenities to find rental units in those same locations.
Many apartments offer amenities like swimming pools, workout rooms, meeting rooms, and social events.
If you are struggling with credit card debt or student loans, renting gives you a chance to pay that down or wipe it out completely. It also gives you a chance to save money, whereas buying a house usually means taking on more debt than you’ll ever see otherwise.
An opportunity cost is a loss that comes from putting your money or time on one thing instead of something else that could have given an equal or better return. In this case, you can invest the money that you don’t spend upfront on your house and then pour into it every month. Or it could be spent on vacations, education, or any number of things you might enjoy or benefit from.
Given all the benefits of renting, why would anyone want to buy a house?
Homeownership can bring many benefits to a person or family and even to a community and society.
The keyword here is Stability.
On the financial side of things, homeownership can be cheaper than renting if you stay in the house for at least a few years. The consensus says five years is enough to make it worthwhile to sink the up-front costs into buying a home.
After that, with a little luck, your home is appreciating, and you can feel that the work you put into it will pay off not only in a better living experience but also in the value of the home.
Over time, you are building home equity – the difference between what you owe on your mortgage and its market value.
There’s a reason they call it putting down roots. Since homeowners are a long-term part of a neighborhood, they tend to care more about its government, schools, roads, taxes, and other issues. They are involved in a way that a renter is not.
Many websites offer calculators to help you run the numbers on rent vs. buy. The first numbers you must determine are how much you can afford to pay per month and how much you can afford to put down.
Experts recommend spending no more than 25 percent to 33 percent of your take-home pay on rent or a mortgage, including principal, interest, property tax, homeowner insurance, PMI, and HOA fees. So if you have a monthly income of $5,000, your payment should be around $1,250-$1650.
If you don’t have enough money for a down payment and don’t qualify for a zero-down mortgage, the choice to rent is made for you. (The U.S. Department of Veterans Affairs supports the zero-money-down VA-backed home loans, and the U.S. Department of Agriculture offers the other government-backed, no-money-down loans.)
If you can pull together a down payment and still have money in reserve, then run the rent vs. buy numbers.
You must weigh many factors, including purchase price, interest rates, your credit score, length of time you plan to stay, inflation rates, taxes, closing costs, and the tax implications. (While homeowners must pay real estate tax, they also have the possibility of deducting the taxes and interest payments.)
But the final decision will come from your gut because it’s not just a matter of money.
All the numbers could push you in one direction, but it's the wrong direction if that choice leaves you without something you must have in your life to feel at ease.
Assuming that the money would work in either direction, there are some important questions to ask about the direction you are heading.
You might be tempted to buy immediately because of the idea that renting is a waste of money and buying a home is an investment that shouldn’t be delayed. But even if you plan to stay put for many years, consider renting first so you can get to know the region.
One might also move slowly here precisely because you plan to stay in the region for many years. Rushing into a purchase could lead to a costly case of buyer’s remorse.
If so, it might be wiser to delay buying a house until the happy union has occurred and you can search together. You also will have a more accurate, lived-in understanding of your financial situation as a couple.
If so, how soon? Couples who are inclined to rent might feel differently about raising children in that same rental.
This question will affect the size of the places you look at. A homebuyer will also have to consider the schools, not only for the effect on real estate values but also for the education your children will receive.
The yard size, proximity to parks, and the availability of sports and other kids’ activities can come into play.
The CJ Patrick Company, which analyzes the value propositions of companies, did a study of median rent prices, median home sale prices, taxes, and insurance, using information from DataTree by First American.
Conditions in the South and Midwest favored buying. The study found that in the Memphis, Tennessee real estate market, for example, the average rent ($914) was almost double the cost of owning.
In cities where home prices are at the high end of the spectrum, like in New York and California, it will tend to be cheaper to rent, the study found.
When it comes to renting vs. owning, the former gives you greater flexibility to downsize. Also, some rental communities offer considerable benefits to older tenants, including health-related, diet-related, and social amenities.
At this point in your life, you will have less time to recoup the down payment and other initial home-buying costs. That money could be invested in ways that will likely give you a better return than what homeownership will provide.
On the other hand, if you are close to retirement age, you might have substantial home equity or own it outright. This gives you options for balancing the amount of down payment against the amount you set aside for savings and investment. The higher the down payment, the lower your mortgage payment. The less you put down, the more you can invest.
If you are 62 or older and own a house, you can get a reverse mortgage, borrowing against the equity in your home, and not have to make payments as long as you live in it. The money can be used to reduce the amount you withdraw from investments. Or it can cover expenses like home repairs or medical costs.
Homeowners also can rent out part of their home to create income, either through a monthly renter or through short-term stays booked with sites like HomeStay and AirBnB.
The answer is: It depends.
The prudent course is to martial all the facts and figures. Make use of online calculators. Be honest with yourself and family members about what you want your daily life to be like. Then spend time imagining daily life in each setting. Be realistic about what you can afford. Establish your deal-killers and acceptable trade-offs. Most of all, think long-term.