A common misconception is that renting means your “throwing money away” while homeownership “builds wealth.” When deciding between renting or purchasing a home, there are many different factors to consider: your personal finances, the real estate market in your area, whether you’re planning on relocating in the near future, and more. All of these help determine which option works best for you—keep on reading to learn more.
What are some things I should consider first?
Personal finances. It’s essential to know your finances when making any significant financial decisions—housing is no different. Having a good credit score is important to your eligibility both as a tenant and when applying for a mortgage, but a good grasp of your budget and current debt will help you plan in the long term. Check out our previous posts on Five Credit Mistakes to Avoid and How to Pay Off Your Credit Card Debt to learn more.
Location stability. Do you plan to settle in your current location, or are you looking to move within the next five to ten years? Purchasing a home is a long-term investment, with mortgage terms averaging 30 years; if your circumstances require location mobility, renting may be a more viable option.
Local real estate markets. Costs associated with the rental and housing market can vary from city to city. According to 2020 research on the top 50 metropolitan areas in the US from CJ Patrick Co., it’s cheaper to own in 24 markets and cheaper to rent in 26. It’s essential to research the real estate market where you’re looking to rent or purchase.
Run a cost-benefit analysis. Renting or purchasing a home each has its positives and negatives and are all things you want to factor in alongside your personal finances, need for location stability, and the state of your local real estate market.
What should I consider when renting?
Often, when we discuss purchasing property, building equity is the first benefit that comes to mind—when the homeowner can sell their house for a profit after paying off their mortgage, effectively treating the home as an asset. This is why the notion of “throwing money away” is synonymous with renting. However, the reality is that not all homeownership costs build equity, and not all property will increase in value.
Instead, renting offers predictability for home expenses. Renter’s insurance, monthly payments, and other costs are usually set for the duration of the tenant contract and only subject to change when negotiating a new one. Homeowners, on the other hand, face instability in payments outside of their mortgage and bills. These can include unexpected home repairs, property taxes, and insurance premiums—all things that add up quickly, which we’ll cover more in the next section. And as mentioned earlier, renting also offers location flexibility. If your lifestyle or career path requires frequent relocation, renting will likely be the best choice for you.
What should I consider when purchasing?
Homeownership is all about comfort, lifestyle, and your long-term plans. While it’s possible to “build wealth” through property ownership, several financial considerations should come first.
For example, say John closes a deal for a $100,000 home. The first payment he makes is his down payment, starting at 3% to 5% of the total home value. Fortunately, he’s financially comfortable paying 10%, or $10,000, then mortgaging the remaining $90,000 with a 4% annual interest rate over 30 years. Since he has a stable income, a good credit score, a history of paying his bills on time, and a low debt to income (DTI) ratio, this loan gets approved immediately.
Of course, John’s example is specific to his situation. While a larger down payment is more beneficial in the long run, not everyone will be able to do so within their financial means. Similarly, different income levels, credit scores, payment histories, and debt all are factors that can impact the value of your approved loan and interest rate.
Once John owns the home, there are other fees he has to pay. This includes property taxes, water and sewer service, repairs and maintenance, homeowners insurance, and potentially additional situation-dependent fees like trash pickup, pest control, pool cleaning, and more.
So while homeownership offers the opportunity to build equity and potentially resell the home for a profit, it comes with a list of financial constraints. However, if your long-term plans are to settle down and build a life in the area, the comfort and stability of homeownership might be your best bet.
So, which one is better?
It all boils down to what you’re envisioning for your future. The cost of renting and purchasing largely depends on your locality, while the benefits are focused on your current lifestyle. If you think you’ll move within five years, renting will be cheaper and more convenient for relocation; and if you’re aiming for long-term stability and comfort, you should consider purchasing a home. Of course, this also depends on your financial situation.
Need advice on how to budget for rent or a mortgage? Contact us, and our team of experts can help!