The first time I asked myself Should I Rent A House Or Should I Buy? My wife-to-be and I were planning our first home together. Trying to decide which option was best for us – buying a house or renting one – we asked everyone their opinion. Many of our older friends and family were firmly in the “buy a house don’t rent” camp while the younger squad extolled the virtues of renting. What were we supposed to do? What do you think is the best choice?
Buying vs. Renting A House: What’s Right For You? To decide whether to buy or rent a home, look at your current finances, lifestyle, and your plans for the future. If these don’t provide a clear answer, evaluate the housing market where you want to live and calculate the cost of each option to help you choose.
The decision to buy or rent a place to live is a personal one which is underpinned by ever-shifting sands. Everything from the national economy, the local housing market, and the stability of your employment to your current financial situation, the kind of home in which you want to live, and your plans for the future – they all factor into your decision. To make the best decision for you, you must arm yourself with the best information, techniques, and advice available. All of this you can find below, and after reading my guide, you’ll be ready to make an informed decision about whether buying or renting is right for you.
Buying vs. Renting: What’s Right For You?
On the surface choosing between buying or renting is, for some people, a no-brainer. The traditional attitude has always been that you should buy your own house as soon as you have the chance and that renting is just throwing money away.
This perspective evolved in the post-war years when home ownership was encouraged to boost the economy. Vast expanses of social housing were demolished, resulting in fewer affordable rental homes, and developers were encouraged to establish new neighborhoods, towns, and even cities. Renting became stigmatized as something only people who couldn’t afford to buy their own home did. Meanwhile, regular, working people had their first real opportunity to improve their long term financial situation through building home equity.
But do you know what?
Things are no longer so cut and dried. Both buying a house and renting a house have changed. So let’s take a look at the general pros and cons of buying and renting, dig into the real costs of each option and run through the questions you should be asking yourself in order to decide to buy or rent.
Oh, and there’s more.
If you’re still on the fence at that point, I have a couple of simple “rule of thumb” methods to compare the costs of renting vs. buying.
Buying – The Positives
Let’s start on a positive note. There are plenty of advantages to owning your own home, and if you are considering buying vs. renting then the upside of buying is that you:
- Can build a certain amount of wealth through home equity.
- May be in a position to take advantage of certain tax deductions for homeowners.
- Could improve your credit score by making mortgage payments.
- Will own an asset against which you may be able to borrow.
- Can budget long term if you opt for a mortgage with a fixed payment.
- Will be able to live without a large monthly payment once your mortgage is paid off.
- Can sell up, make a profit and move up to another, bigger home.
- Could also choose to sell-up and downsize after retirement and enjoy the nest egg.
- Can decorate, remodel, expand, extend, or tear down anything you like (within reason!)
- Will reap the financial benefits of any value added to the home through improvements.
- Can have pets if you wish
- Have the opportunity to rent out the house to others and reap the financial benefits of being a landlord while building equity.
- Do not have to worry about a landlord swinging by to inspect the property, or curtailing your enjoyment of the house in any way.
- Have a greater degree of security for the family and can send children to the same school without disruption
- Will be able to enjoy the pride of ownership and the social status that goes with it in certain circles.
Renting – The Positives
That’s not to say there aren’t plenty of positives when you chose to forego ownership and rent the home in which you live. The advantages of renting are:
- Depending on where you live, rent can be significantly lower than a mortgage payment.
- There is no requirement for a large down payment before you can begin to rent.
- You avoid all of the ongoing costs of home ownership such as property taxes, house, and mortgage insurance, etc.
- Some rentals come with one, two, or even all utilities and bills included in the rent.
- Many condos and planned communities have extra amenities such as a gym or pool.
- There is no worry about home depreciation or fluctuations in the economy and housing market
- You have few if any maintenance costs.
- If something breaks, it is a cost for the landlord to bear, not you.
- Regular maintenance, repairs and any other issues related to the structure are the landlord’s problem. You do not have to worry about organizing contractors etc.
- It is easier to downsize, move to another city, take a job elsewhere, or have a larger home if your family expands.
- There is more flexibility with a rental. If you chose to live abroad for a year, take an internship, or travel extensively, there is nothing to tie you down.
- Renting can allow you to live in a neighborhood in which you could not afford to buy a home.
- If you hit a rocky patch financially, there are no worries about foreclosure and losing all of the money you have sunk into the house.
- If the neighborhood character changes, you can move out, without having to worry about being able to sell your home in what has become an unpopular area.
Now we have extolled the virtues of both renting and buying, let’s move on over to the dark side and dip a toe into the negatives of each.
Buying – The Negatives
You buy a house, make loads of money and retire to the beach, what could possibly cast a show over that sunny picture?:
- Not everyone has the income, savings or credit history to qualify for a mortgage.
- In some neighborhoods, especially those that are popular, house prices are significantly higher than surrounding areas and as such mortgage payments far exceed rent payments.
- You have the stress of saving for a deposit and qualifying for a mortgage every time you move.
- There are multiple other payments to make on top of your mortgage, such as property tax, insurance, etc.
- Homes can depreciate leaving you worse off financially than when you started.
- Those who get caught up in bidding wars, and even those who do not, can end up overpaying for a property.
- If you have a variable rate mortgage, you can see your monthly payments go up and find yourself financially overstretched.
- Experts suggest you put aside as much as 1% of your homes value, every year, in order to afford long term, irregular costs such as a new roof, etc.
- In the event of a natural disaster, you might find your house severely damaged, or completely destroyed, and even the most extensive insurance policies may not cover your rebuilding or repair costs.
- Unless you are a budding Bob Vila, you will have to track down and pay for professionals to carry out repairs and maintenance. This is not just a financial burden; it is also stressful and time-consuming.
- Even if you are handy with a hammer, being responsible for all repairs and maintenance still requires you to buy all of the tools and materials you need for jobs around the home, not to mention the time it takes to carry out each task yourself.
- Many enthusiastic, but unskilled DIY’s have even reduced the value of their homes through their attempts at repairs and improvements.
- If you find yourself in financial trouble, you risk losing your home to foreclosure as well as all of the money you have sunk into it during your ownership.
- It is more challenging to move home quickly when you own the house in which you live. Many people have had to turn down employment opportunities, take on a second home, or live apart from their family because they are unable to sell up.
- Unless you live in your home for several years, when you factor in the costs of selling your home and buying another, you are unlikely to come out ahead financially.
Renting – The Negatives
Of course, renting isn’t all sunshine and lollipops either. When you rent your home:
- You are stuck paying rent month-in and month-out even when you are old and grey.
- There is no way to build equity and no opportunity to “cash-out” of your rental.
- When it comes to leaving an inheritance for your children, there will be no family home or valuable asset to pass on.
- Your landlord can sell their property which could result in an unwanted move for you.
- Neighborhoods with a high number of rentals can have a transient atmosphere with little sense of community.
- Some rentals have few restrictions while others can make it feel like you are living under a dictatorship, with little control how you can enjoy your home.
- Renters are seldom allowed to decorate or make changes to the property which can prevent you from making the house feel like your own home.
- There is a significant lack of supply in some rental markets with few opportunities to move into your neighborhood of choice.
- When your family expands, it can be difficult to find larger family houses to rent for an unrestricted period. This can be having to move your children multiple times, through a variety of school systems and limiting the “lifespan” of their friendships.
- There is a distinct lack of security when living in a home which does not belong to you and from which you could be asked to move.
- The landlord can carry out repairs with substandard workmanship or materials leaving you living conditions less than optimal.
- You may experience rent increases every year.
- In a rental unit the appliances, fixtures, and fittings may be low grade, outdated, or just not what you would prefer.
- Many rentals do not allow pets, or if they do they require an additional pet deposit and even, in some cases, regular landlord inspections to ensure the pet is not damaging the property.
Buying Vs. Renting: What Are The Real Costs?
Weighing up whether you should buy or rent frequently begins and ends with an evaluation of paying monthly rent, with no tangible asset to show for it vs. paying a mortgage, but in time having ownership of a saleable property.
It’s a significantly more complex than that. Take the costs of buying a $200,000 house.
The Costs Of Buying
Buying a house has both one-time and ongoing costs. Although, having said that, unless you buy one home and live in it forever, those “one-time” costs are incurred every time you move home. Therefore it might be more accurate to call them “one time per property” costs. These include:
- If you do not pay with cash and require a loan, you will have to pay a mortgage origination fee which is charged by lenders when they process your mortgage application.
- Costs incurred during the purchasing process such as home and other inspection fees.
- Real estate agent and/or lawyer costs outside of the regular commission which is paid by the seller.
- Closing costs which can vary from, if you’re fortunate just a few hundred dollars, into the thousands.
- In some cases, you may end up paying random additional costs such as hotel fees if you need somewhere to stay between having to move out of your existing home and into your new one.
In addition to these fees remember. Not every purchase on which you embark results in you buying the home. On some occasions, you might withdraw as a result of something such as a home inspection report or an unfavorable appraisal. In these cases, you may still end up paying out hundreds of dollars in fees and have nothing to show for it.
On average, these will cost a total of $2,250 for a $200,000 house.
Ongoing monthly costs you will incur once you have bought your home include:
- Mortgage interest
- Payments against the principal of your mortgage
- Property taxes
- Homeowners insurance, and if you are paying a mortgage with a less than 20% down payment, loan insurance.
- Additional insurances, such as a flood policy, depending on the location of your home
- Homeowner Association and/or condo fees.
- Repairs and maintenance, which may vary from month to month and will vary according to whether you go the DIY route or use contractors. Depending on the work you may also incur permits and local inspection fees.
There are also additional “hidden costs” such as upgrades to appliances, outlay on new tools and equipment for home maintenance and repair, and the costs of renovations, extensions, remodeling and updates, especially to areas such as the kitchen and bathroom. In some cases, this can be offset against the increase in the value of the home.
The Costs Of Selling
If you are a first-time buyer, and that is most likely if you are reading this, then you only have to worry about the initial buying costs at this point. If you intend to buy, sell, and move up the property ladder, or if you are thinking of selling your home and considering whether to buy again or rent, you should also factor selling costs into your decision.
The average seller pays:
- Real estate agents fees. These are usually 5% – 6% of the sales price
- Minor repairs and other work to make the home “sales ready.”This can range from very little for a few DIY touch-ups to significant costs, especially if the home inspector finds an issue that you are expected to pay for or reduce the sales price to cover.
- Closing costs and other fees. These are an average of 2%-4% of the sales price.
Using the halfway points of a 5.5% real estate agent fee and 3% for closing costs plus a conservative $2,000 to “pretty-up” your home, it will cost a total of $19,000 to sell a $200,000 house.
Oh, and don’t forget, if you sell a property which you have owned for less than two years, any money you make on it will be subject to capital gains tax.
The Costs Of Renting
While renting doesn’t involve the wallet-draining purchase process of buying, there are still a few one-time expenses to consider alongside the ongoing costs.
One-time per home expenses include:
- A security deposit is a basic requirement for rental properties. The landlord will return your deposit at the end of your time in the home. They have the option to subtract the cost of any property damage the needs repair, rent arrears, etc., before returning the deposit, or what is left, to you.
- The first months rent, or if you move in the middle of the month, you will need to make a pro-rata payment.
- In some states, landlords may also charge a non-refundable deposit for special provisions. A typical example is the pet deposit.
Monthly costs of renting:
- The rent.
- Some pet owners may be charged pet rent instead of a pet deposit.
- Renters insurance to protect your belongings against fire, theft and natural disasters
- Utilities. Depending on the rental all, some, or none of the services will be included in the rent.
Costs For Both Options
I have left out the costs which are incurred by both buyers and renters which include:
- Moving costs. Some people assume that those who buy are more likely to hire a professional moving company and, renters are more likely to be DIY movers and that, as a consequence, it costs more to move when you buy than it does when you rent. In my experience, this is not so, and the level of costs are not necessarily dependant on buying or renting.
- “Making your mark” costs. Again, these are not dependant on whether the resident is a buyer or a renter. These are those peripheral costs we tend to incur when moving and making your new place feel like home. I’m talking about new furniture, bedding, cushions, that kind of thing.
A Word About Tax
The changes in the 2018 regulations serve to highlight the fact that tax benefits can disappear faster than you can say “We’re turning the entire tax system upside down.” Not only that but to benefit from these breaks you have to itemize your return, which most people do not.
For this reason, the income tax impacts of home ownership have been excluded.
How To Decide What’s Right For You
Buying or Renting- deciding which one is right for you is about so much more than the basic monthly mortgage vs. monthly rent. First and foremost, before you move on to thinking about cost you need to ask yourself :
- How long do you plan to stay in the home? While none of us can guarantee we will be in the same place for X number of years, most of us an idea of where we want to be. As a general rule of thumb, if you buy a house, it takes approximately five years to appreciate enough in value to absorb the buying and selling, and ongoing monthly costs and still come out ahead financially with a worthwhile amount of money in hand.
- Do you intend to go back to higher education? Apply for an internship? Travel the world? Work in a field that might require you to move around the country? If your home is in commuting distance, there is no problem, but if you have plans that will need you to move then renting now is your better choice. Buying a home and renting out either intermittently of for short periods is an option, but is by no means a stress-free or financially stable one.
- How much responsibility are you comfortable with? As soon as you become the proud owner of your own home, you acquire a raft of responsibilities from repairs and maintenance to property taxes and homeowner association commitments. It can be a lot to shoulder if you are not ready for it.
- Do you want stability? Owning your own home is significantly more stable and secure than renting. Even those who live in specially built, long-term rental units can find themselves suddenly out of a home because the owner is selling up or plans to demo or reno.
- What does freedom look like for you? If being able to pack your bag and move at a moments notice is your idea of freedom then renting is your best bet. On the other hand if owning a home in which you are free to have pets, decorate or renovate how you wish, and enjoy without the oversight of a landlord, is your version of freedom then buying may be your best option.
- What are your long term financial goals? Many people believe that owning a home in which they will build equity is their only way to achieve economic growth. If this is your primary motivation, stop now. Although a great many people do end their home ownership journey with a sizable nest egg, this is becoming less common and is by no means guaranteed.
For example, following the 2007 financial collapse the average US house price dropped an average of almost 13% from $247,900 in 2007 to $216,700 in 2009. Although this is the average, in some markets the drop in value was significantly worse. In Miami, prices dropped 51% and in Las Vegas house prices plummeted by an eye-watering 62% in the same period.
There are ways to build wealth other than buying a house & keeping your fingers crossed you’’ make a decent profit in 30 years.
- How important is quick access to cash? Some of us are happy to have all of our “extra” money tied up in bricks and mortar and can live comfortably on our regular income. Others prefer to squirrel away any extra money into a place where it can be quickly and readily accessed. Generally speaking, renting equals a higher chance of having ready cash saved while buying means more of your money will be tied up in a less easily accessed way.
How good are you at saving, not spending cash? On the flip side of #7 if you find it difficult to save and not touch it, and find that as soon as your money is in your hand it flows through your fingers like sand then buying a house can be viewed as a form of inforced saving and may be the best option for you long-term.
- Do you have savings? Are you in a position to buy a home with enough of a personal economic safety buffer? If you are at the stage where you have just about saved the bare minimum deposit, and you could cover your buying, moving, and monthly house cost as long as you live on instant noodles for the next three years, then renting and saving more would put you in a better position to buy in a few years time.
- Are you choosing what you can afford over what you want? It can be tempting to buy almost any house because it seems like an excellent first step on the property ladder. The theory is that it will increase in value and you can quickly sell up and move to something better. This doesn’t always work out. Sometimes those who travel down this route end up stuck in a home they don’t like and can’t afford to sell because they have negative equity.
For some people, answering these questions will give a clear indicator of whether buying or renting is right for them at this moment in time. However, if you’re still undecided, there are a couple of ways to play with numbers that will give you a rough financial comparison for buying vs. renting.
Buying vs. Renting – Quick And Dirty Cost Comparison Methods
Working within the context of everything I have said up until this point, taking into account all of the variables and all of the unknowns, if you still want a way to compare whether you will be better off financially by renting or buying this is how to do it.
These are not only rough guides, but they should be used to evaluate costs in the same market. Trying to decide whether to rent in Dallas or buy in Delaware won’t work.
The “Rule Of 15”
The Buy vs. Rent Rule of 15 requires you to find the average rent for the kind of property in which you want to live, located in your chosen neighborhood. Now multiply the annual rent cost by 15. So, if the rent is $1,200 per month that’s $14,400 per year, multiplied by 15 give you $216,000.
Now you use that “golden number” to evaluate whether buy or renting would be right for you.
When you look at a house, if the sales price is less than your “golden number” then you would be better of renting, and if it is higher than your “golden number” you will be better off buying.
So with a “golden number” of $216,000 if you look at a comparable house with a value of $216,000 or above buying is the better option. If the house is valued at less than $216,000, you are better off continuing to rent.
The Price To Rent Ratio
To find your price to rent ratio you again calculate the cost of one year’s average rent, but in this case, you take the list price of a comparable property and divide it by the annual rental rate. The number you end up with is your Price to Rent Ratio. A ratio of 1-15 means you will be better off buying while anything of 16 or above makes renting more favorable.
Using the same annual rent of $14,400 as we did in the last example if a comparable house were listed at $250,000 the ratio would be 17.4 so you would be better off renting. On the other hand, if you found a property that was comparable with the rental and was listed at 200,000 the price to rent ratio would be 13.8 and buying would be the better option.
Oh, and just to be difficult.
Some experts believe in the 1-15, and 16+ split. Meanwhile, others argue a ratio of between 1 and 20 means buying is best and 21+ means you should rent.
When you are facing the decision of whether to buy or rent a home, people will give you all kinds of advice. Much of this is based on their personal attitudes to ownership, and the ways in which they have experienced the housing market. Both of these things have, and will continue to change so thank them politely for their advice, but don’t base your decision on it.
If you have read this far you’ll know that the choice of what is right for you will vary from person to person and that there is no single cut and dried, “one size fits all” answer.
Use our questions to decide what’s important to you and where you want your plans to take you. Review the section’s on the pro’s and con’s and the actual costs of renting vs. buying to support an informed decision, and for those that just HAVE to have some numbers, use the rule of 15 or the price to rent ratio to reinforce, or otherwise, whatever you have decided.
Above all, no matter whether you buy or rent, enjoying your home is more important than whose name is on the deed.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.