Renting vs Buying a Home
When it comes to whether to rent or buy a home, there isn’t one single answer that’s right for everyone.
In general, the longer you stay in one place, the stronger the argument for buying (since the costs are spread out over time). However, buying a home is more than just a financial decision. There are many factors involved, including the cost of buying vs renting in your area, housing availability, your lifestyle, and your family situation.
Here’s how buying and renting compare.
What You Get for Your Money
The biggest advantage of buying is that your payments each month go towards a home you’ll own. Once your home is paid off, you’ll still have some housing expenses, such as maintenance and repairs, but they’ll be considerably reduced.
The most common argument against renting is that you “throw your money away.” This is not exactly true, since you do get something for your money—a place to live. It is true, though, that you have nothing tangible to show for your years of payments.
The ability to build equity is one of the main reasons home ownership is often a good investment. If your home appreciates in value more than you’ve paid in interest, taxes and maintenance over time, you earn a return. It is important to remember, though, that this isn’t a sure-fire guarantee.
A renter can come out ahead if the money that would have been put towards a down payment, and any money saved by renting (such as property taxes, loan interest and insurance costs), is invested. These investments might include interest-bearing accounts, CDs and stocks. Of course, there are no guarantees on the stock market, either!
The government encourages home ownership, and rewards it in the form of significant tax breaks. You can deduct mortgage interest on up to $1 million of debt used to acquire your home. You can usually also deduct state and local property taxes on your federal income tax. This does mean your taxes will get more complicated, as you’ll need to itemize deductions.
There are no tax breaks for renting. You don’t have to directly pay property taxes, but if property taxes go up in your area, you may find that reflected in higher rent.
Initial costs of buying a home include the down payment (traditionally 20% of the home price) and other fees. You may be able to obtain a loan with a smaller down payment, though this often comes with higher mortgage rates and additional insurance.
Renting requires a security deposit (usually the amount of one month’s rent) which is refundable if the conditions of the lease are met and the property isn’t damaged. You may be required to pay the first and last month’s rent upfront.
As a homeowner, you pay for many things you don’t have to directly as a renter, including loan interest, property taxes (though these two are deductible), and repair costs. There is homeowners insurance, plus additional insurance for flooding, earthquakes, etc should you need it. There may be condo fees, community fees or association fees. These all need to be factored into a homebuyer’s budget.
If you rent, your landlord may require you to have renters insurance. (In any case, it’s a smart idea.) However, it is relatively inexpensive. Depending on the terms of your lease, you may incur some maintenance costs, such as lawn upkeep.
As a homeowner, you are responsible for the costs and labor associated with repairs and maintenance. These increase if you save money initially by purchasing an older home or “fixer upper.” Some of these costs, such as a new roof or major electrical repairs, can be considerable, so homeowners are wise to budget ahead.
A reason some people prefer renting is not having to worry about maintenance and repairs, especially if they don’t have the time, know-how or desire to perform these tasks themselves. When the water heater fails, the ceiling leaks or the AC goes out, help is a call to the landlord away. A renter will likely be on the hook for repairs if they damaged or misused the property.
Stability of Payment Amount
If you have a fixed rate mortgage, you’ll pay the same amount over the term of the loan unless you refinance.
When you rent, you’re at the whim of the landlord if they want to raise your rent. (That is, unless you’re lucky enough to get into a rent-controlled property.) You can move, but if there are fewer properties than renters who want them, you may be stuck paying more.
Making a Home
Owning a home gives you the freedom to decorate, paint, remodel and landscape as you choose. (You may have some restrictions if you’re in a Homeowners Association.) Most first time homeowners find the freedom and pride they feel in their new home thrilling.
Rental properties generally allow only minor changes, if any, with permission. You are usually required to restore any changes to original condition.
When you own a home, you may share that home with any type or number of pets permitted by law, that you are able to care for.
Many rental properties don’t allow pets, or they may have restrictions on the type, size and number of pets you can have. This may make finding a home for yourself and your animal pals more difficult. You may have to pay an additional pet deposit and/or monthly “pet rent” in order to offset potential damage and extra wear-and-tear.
Stability & Community
Putting down roots by owning a home provides homeowners and families alike a sense of community. You build lasting relationships by becoming part of the neighborhood community. Your children can develop lasting friendships with neighbor kids and learn from respected older neighbors.
This can occur in rental communities where people live long-term, but in general, people tend to move in and out of rentals much more frequently.
On the flip side of the coin, renting offers greater flexibility, and is often the better choice for people who anticipate moving frequently for their career or other reasons. Even a relocation across the same city can make a difference in transportation costs and convenience. Depending on the term of the lease, you can be free to move in as little as a month.
Buying a house is a longer-term commitment. There is time, effort and cost involved in selling and buying a home. If you’re in a situation where you must sell your home quickly at a time when prices are down, you may not make a return on your investment.
A Final Note
Whether renting or buying, it’s important to practice good financial sense. Don’t overextend yourself with more house (or rent) than you can afford. Set money aside for an emergency fund. Keep your debt and credit score under control.
For more on whether you’re financially ready to buy a home, read our article: When to Buy a Home.