Rent versus Buy: The Age-Old Housing Debate

It’s a popular time of year for home sales, with many people looking for a new place to live, and open house signs dotting the neighborhood each weekend. Once you’ve narrowed down the area you want to live, the next big question is whether you should rent or buy. Many people point to home ownership as the American dream where you can build equity rather than renting which is considered “throwing your money away”. But financially, it doesn’t always make sense to buy over renting, and there’s often more than just financial considerations to take into account.

Rent versus Buy: The Age-Old Housing Debate

So, rent versus buy? The answer is: it depends.

How long are you planning to live in the same location?

If you’re planning to live in your new neighborhood for less than 5 years, buying can eat up a chunk of your money in closing costs, moving costs, and mortgage interest which is front-loaded into the early years of your loan. You won’t have a chance to build up equity and you’re probably better off renting. Consider whether the size of your family will be changing (as you have children or your children grow up and head out on their own) or your job will be moving to a new location.

What is the cost of rentals versus the cost of homes in the area?

Different markets vary as to how expensive rentals and homes are, not to mention how high the real estate taxes are. Do your research to see which makes the most sense. Currently, it is cheaper to buy a home than rent in a majority of the U.S. real estate markets, especially with the low mortgage rates. But your desired market may be in the minority, and of course the situation is subject to change. Using a detailed rent versus buy calculator can help you figure out the situation in your neighborhood.

Do you have savings for a down payment? Do you have good credit?

While renting requires savings for a security deposit, home purchases are best made with a down payment, preferably of 20% or more in order to avoid the added costs of Private Mortgage Insurance (PMI). If you don’t have that much saved up, buying a home can end up costing even more. Likewise, if you don’t have good credit, mortgage interest rates will be higher if you qualify at all.

Do you need to keep your funds accessible?

Once you’ve taken your savings and put it into owning a home, your equity may rise, but it’s not that easy to access. Getting your money out requires you to sell (perhaps not at the best time for the market) and selling can take longer than expected. You can access your equity through a home equity loan or line of credit, but that’s subject to approval and interest charges. If you expect to need your savings for other needs, renting while stashing your money in an easily liquidated investment may be a better option.

Is the value of the neighborhood going up or down?

Often homes are talked about as investments. But every investment comes with risk, and the biggest risk is whether the value of your neighborhood is going up or down over the time you’ll spend there. If you’re not sure how long you’re staying, you may find yourself stuck selling during a down time in the market. But if you’re sure this is the long-term home for you, and the value of the neighborhood is rising, buying might be a great investment.

How stable is your job and income?

While it’s important to maintain your income no matter who you make your housing payment to, owning a home means you’re risking the savings you’ve invested. Can’t make you rent payments? The landlord evicts you, but your bank accounts are generally safe. Can’t make your mortgage payments? The lender forecloses and you are likely to lose all the equity you’ve built up. It’s also important to know how likely it is that you’ll be transferred to a new location or forced to move to look for a new job.

Do you want to be responsible for maintenance, repairs, and appliances?

If you rent an apartment or home, the landlord is typically responsible for the upkeep, such as maintenance, repairs, and replacing appliances. If you’re planning to buy a home, you’ll need to be sure you have funds available to handle those needs as they come up. While the cost is your responsibility, this also means you’ll have control over when and how such repairs are done.

Are you interested in renovating or making improvements?

Clearly if you want to customize your living space, buying a home (or building one from scratch) is the only way to go. While often times renters are allowed to change paint colors (so long as they repaint before leaving), that’s typically the extent to which you can customize your surroundings.

What about the tax deduction?

No debate of rent versus buy is complete without someone mentioning the tax advantage. Depending on your tax situation, a deduction for mortgage interest might help reduce your tax liability. But think of all the interest you need to pay just to get that deduction. While it is helpful, it’s probably not a deciding factor to buy rather than rent.

Do you prefer to rent or buy?

While the financial questions are important, it’s even more important to know yourself. Do you want to buy a home, with its advantages and responsibilities, or are you happier renting? What does your life currently look like and which would fit into your life better?

Way back when I was starting out, my first wife and I rented an apartment for a few years until we were ready to buy a home. I enjoyed home ownership and took pride in my property. When I got divorced, I went back to renting an apartment, until eventually I decided to purchase a condominium, where I had some of the advantages of owning mixed with some of the advantages of renting (centralized exterior maintenance, amenities like an outdoor pool). I purchased a new condo with my current wife and we are very happy with it. Renting and buying were both right for me, depending on the different circumstances of my life at the time.

When you’re ready to make the decision to rent or buy, carefully consider all the factors that go into the decision. Don’t rent just because the housing bubble burst in 2007, and don’t buy just because you’ve heard that renting is like throwing your money away. Carefully weigh the specifics of your situation…the local real estate market, your needs and circumstances…and figure out the best financial and personal choice for you.

Are you renting or buying? Was it the right decision financially? Was it the right decision for you?

Image courtesy of renjith krishnan at freedigitalphotos.net (with changes)

2 Comments

  1. Jayson @ Monster Piggy Bank

    Gary, this is really a good guide. It is really a personal choice or everyone’s situation is different. But, I prefer to buy. It takes a few years for buying to become a better deal than renting. I think it is because there are some big up-front costs when buying, and my monthly payments from buying are higher, although those payments are building equity in my home while I am making my payments, my home generally appreciates in value. After years, the equity I’ve paid into my home plus the appreciation will usually overcome the extra money I had to pay to get into the home.

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