This is certainly an intimidating question. First and foremost, there is no universal yes or no answer to this question seeing that real estate is constantly in flux and extremely local. One must also consider with homeownership comes responsibility, while renting may be relatively carefree.
Rent vs. Buy Ratio
Before we talk about the pros and cons of renting vs. buying, I wanted to touch on the many ways pundits determine if it’s more economical to buy than rent, and vice versa.
There are plenty of different rent vs. buy calculators out there, but most compare annual rents to asking prices to find out if it’s a good or bad time to buy.
For example, there is the “rent vs. buy rule of 15,” which says to multiply the annual rent of a comparable property by 15.
So if rent is $1,000 a month, it’s $12,000 annually. Multiple that number by 15 and you’ve got a suitable purchase price of $180,000.
Trulia uses a “price-to-rent ratio” that follow the same formula, whereby you take the list price and divide it by one year’s rent.
Using our prior example, $180,000 divided by $12,000 would be 15. Trulia considers ratios of 1-15 as more favorable to buy than rent, whereas numbers of 16+ favor renting.
Pros of Renting a Property
Let’s start with the beauty of renting an apartment or a home. When you rent, you pay a landlord a certain dollar amount each month.
Put simply, this dollar amount is typically less than the going cost of a mortgage, assuming you factor in the insurance and taxes. Oh, and the maintenance.
Sure, a mortgage may appear cheaper, but guess what happens when your toilet breaks? You can’t call your helpful resident plumber and get a free fix.
You’ll either have to get down with some DIY or open your checkbook. So renting, while seemingly the same price or even more expensive than owning, might still wind up cheaper.
There’s also a huge psychological freedom to renting. You aren’t locked in for 30 years. At most, you probably have a 12-month lease agreement. And there’s even a good chance you’ve got a month-to-month deal in place.
In short, you won’t feel trapped, and you can freely move on if you want/need to for any reason, such as job relocation, downsizing, upsizing, etc.
This should make it a lot easier to sleep at night.
Cons of Renting a Property
On the other side of the coin, renting seems to be synonymous with temporary.
If you want to establish a household, renting an apartment or a home might not be the best way of going about it.
You might also be limited to what you can do to the unit. Pets aren’t allowed? You can’t paint the place? You can’t do X, Y, or Z?
Oh, and those rent payments never stop – sure, 30 years is a long, long time, but your lifetime will probably be longer.
There won’t be any relief in retirement when you rent – you’ll keep paying your landlord for “as long as it takes.”
And at the end, you won’t have anything to say for it, no home equity or ownership, despite all those payments. Nothing to hand off to your kids or to sell for cash proceeds.
Additionally, your rent can and will most likely rise, even if some level of rent control is in place.
So you might be paying less than your neighbor with the mortgage today, but if your neighbor’s mortgage is fixed, they’ll still be paying the same amount in the future while your rent shoots higher.
Pros of Buying a Home
Well, the obvious advantage is that you actually gain home equity, or ownership in your home.
In other words, over time the home or condo actually becomes your property, as opposed to renting, where you never own anything aside from the measly contents.
Additionally, owning might be a cheaper alternative than renting these days in many markets across the United States thanks to the low interest rates on hand.
Do a simple online search and you’ll find plenty of places where it’s “better to buy than rent.”
In many cases, your mortgage payment, even when factoring in taxes and insurance, may be less than what a landlord charges for rent.
Why pay $2,500 in rent if you can make a $2,200 mortgage payment, especially if you can write off the interest and the taxes?
That’s right, with homeownership comes tax benefits. Of course, the future of the mortgage interest deduction hangs in the balance, but real estate taxes are still fully deductible.
Factor in the tax savings and your mortgage payment gets even cheaper compared to a rental payment.
An owner of property also has fewer restrictions, and can add or modify to their heart’s content, less any government bureaucracy.
This means you can make your property worth even more over the years, or simply make it more useful/attractive for you and your family.
Cons of Buying a Home
There are plenty of disadvantages to owning property as well. First off, you must come up with a sizable amount of money, either for down payment or to buy outright.
With rent, typically you just need the first and last month’s payment. When buying, you’ll need at least 3.5% of the purchase price in most cases (FHA loans), which can be a hefty amount in higher-priced areas of the nation.
You also have to pay real estate taxes and insurance, which don’t stop once the mortgage is paid off. You may even need to pay costly HOA dues.
You can’t just pack up and move along with ease. It takes time (and money) to unload a property, and you might not make out as much as you think once you factor in real estate commissions and less-than-anticipated home price gains.
Heck, your house might even lose value.
In Summary
When you rent, you pretty much know what you’re getting into. You’re not going to make any money, but you’re not going to explicitly lose any either. And it’s mostly a hands-off type of deal.
With a home, you’re making a bit of a gamble on your future, and the future of the economy.
After all, you need to put a certain amount down, and you need to ensure you keep making money so you can keep up with your mortgage payments.
You’ve also got to set aside an emergency fund so you’re able to pay for repairs if and when necessary.
But ideally, the tradeoff is that you’ll be rewarded for making that homeownership leap of faith.