I'm asked this question about renting vs owning a home quite often. Many people seem to share the sentiment that renting a home is basically throwing away money. But is it really?
Are you in the market to purchase a new home or is it on your list of goals in the foreseeable future? Is one of the factors driving your decision due to the fact that you think renting is a waste of money?
Well, before you make a final decision, below are some key things to consider.
How to know if renting vs owning makes sense for you
Even though you've probably heard all your life that homeownership should be the ultimate goal. You are right to question it. In addition, the housing market has changed since the time owning a home was realistic and practical for everyone.
Even though mortgage rates are at a historic low, home prices and the upfront cost of buying a home are higher than ever. You need shelter and both choices involve monthly payments, but there's more to it than that.
Consider all the renting vs buying pros and cons. Because whether you rent or own should make sense for your lifestyle, personal goals, and financial situation.
1. Compare your home expenses when it comes to renting vs owning
A lot of people make the mistake of thinking that they'll simply go from paying rent to simply paying a mortgage and that will be it. However, a large part of the renting vs buying pros and cons are the associated expenses outside of your monthly mortgage payments.
For instance, you'll need to include things like closing costs, the cost of moving to your new home, homeowners' insurance, and maintenance. More specific costs include landscaping, grass cutting, snow removal, homeowner association fees, renovation work, decorating, etc.
Its also very important to consider things like the age of the roof, as well as the age of the appliances and systems. For example, plumbing and electrical. This is because if and when these need repair or replacement, they are major expenses.
Note that you'll also be paying more for utilities in a house because it's a bigger space. That's why you need to consider more things when doing a renting vs buying pros and cons assessment.
As a renter, on the other hand, it is very unlikely that you will be responsible for these expenses. You'll still want to make sure you have the right type of renters insurance though.
So don't be too quick to decide that renting is a waste of money. You want to compare your expenses as a renter vs. your potential expenses as a homeowner to see what makes the most sense.
2. Determine how long you intend to stay in the home
Homeownership can be very expensive especially when you factor in your main costs outside of your mortgage. For instance, repairs and maintenance, property taxes, insurance, and home improvements.
If you do not intend to stay in your home long-term or at least long enough to build equity, then your home could be a money pit. Take your time to think about renting vs owning, especially if you're not ready to put down roots yet.
Building home equity, however, is dependent on the neighborhood, economy, and other factors. If you sell too quickly before your home value increases, buying a home can become a sunk cost.
If you purchase a home and decide to sell it a few short years (or months) after purchasing it then you could lose money. It is likely that any equity you build over that period will be eaten away by closing costs, realtor fees, and taxes. All of which could cause you to come out in the red.
3. Review your loan qualification carefully
So many people, especially first-time homebuyers, are financially overextended as a result of underwater mortgages. This is because they went by what the bank said they could afford. They did this instead of looking at their budgets to determine what they could truly afford. It's critical to avoid this costly mistake.
Mortgage lenders and banks will qualify you for loans based on your pretax income. They can also decide to exclude certain debts when considering your application based on your future earning potential.
For example, let's say you are a lawyer with student loans but you have a high future earning potential. The bank can decide to minimize or ignore the weight of your debt in factoring how much of a loan you are approved for. This is NOT to your benefit.
It's important to factor all your debt and monthly bills into your budget. Then you can use your budget to determine the home purchase price you can really afford otherwise you can get in big financial trouble.
Its all about planning and doing the right research and determining what works for what you can afford. Your goal should be to keep your housing costs at 30% or less of your income otherwise your budget can get really tight.
4. Be mindful of considering your primary residence as an investment
Another reason people look at owning a home is that they feel that they are making a good investment.
However, note that just because your home value may increase does not necessarily mean that it's an investment in the true sense of the word. This is because your primary residence is also your shelter.
The goal with an investment is that you earn money when you sell it. You do this by purchasing investments at the lowest possible cost and having the least amount of expenses associated with them. This gives your investments the potential to appreciate and earn you a profit in the future.
When it comes to using your primary residence as an investment, you have to weigh all the transaction costs and associated expenses against the sales price.
Also, keep in mind that when you sell your home you still need somewhere to live. This will also cost you money. This cost will also need to be factored into whether or not your primary residence as an investment is a worthwhile investment.
So for example, let's say you are expecting your home to appreciate by $100,000 in 10 years. How do you deem it a truly profitable investment? Well, that $100,000 of appreciation will have to be more than your expenses over those 10 years.
This is including your down payment, mortgage payments, HOA fees, maintenance costs, repair costs, and taxes over that time. You should include the cost to acquire your next place of shelter as well.
On the other hand, rental property can be looked at as an investment because the majority of the costs will not come out of your pockets. Instead, they are covered by the rent payments you receive. Again you'll need to make sure the numbers work in your favor.
Renting vs buying pros and cons
The decision of whether to rent or buy doesn’t have a simple answer. In reality, you have many factors to consider such as your finances, preferences, and future plans. To help you think about your options, here's a snapshot of renting vs buying pros and cons.
Pros of renting vs buying
We all need a place to live and it will always cost money one way or another. So, renting doesn't always mean throwing away money.
In fact, renting offers people the flexibility to move. Renters have more or less predictable monthly payments as well. Furthermore, the upfront cost of renting only involves paying a security deposit and not much else.
Also, renting often means you don't have to handle repairs. You're only expected to do basic maintenance of your living space. And there is no long-term commitment to stay.
Cons of renting vs buying
While there are many advantages to renting, it does have its drawbacks. For most people, the biggest deal-breaker is not truly owning a space. You're limited to what you can change and how you can decorate. And most of the time, you can't have pets.
Also, your rent isn't fixed. Your landlord can raise your rent when they see fit and you can get wedged out of your home because of a price hike.
You're not financially responsible for repairs and maintenance, but you're also at the mercy of your landlord for such things. Since they're not the ones living with broken appliances or clogged toilets, they may not fix it as fast as you'd want them to.
Make sure to ask questions and read your lease agreement to protect yourself. There are legal pathways you can take, but it's such an inconvenience. Add the fact that you may be living in a space with broken appliances or clogged toilets.
Pros of buying vs renting
A lot of people want to own their home for the intangible benefits such as privacy, a sense of stability, and pride of ownership. This is why renting vs owning a home is a matter of personal preference.
Buying gives people the ability to update and decorate their homes as they wish. It means having the freedom to paint the walls a specific color or own pets.
Homeowners also enjoy tax benefits such as mortgage interest tax deductions. And if you choose the right home and own the property long enough, home equity does increase.
Cons of buying vs renting
To start with, buying a home comes with upfront costs that first-time homebuyers may not have saved up for. Aside from a large down payment, there are extra expenses like closing costs and property taxes. This is why renting vs owning a home isn't that clear cut for most people.
In addition, moving costs can cost a few hundred too. Plus, once you're in, repairs and maintenance may cost you more. A good reminder that not all of the costs of homeownership go toward home equity.
And don't forget that you need to stay long enough in a house before you can realize and benefit from home value increases.
Renting vs owning calculators
Outside of personal preferences and goals, you may have, you can use renting vs owning a home calculators to see whether it's more or less expensive to buy or rent at a given time. Here are some "renting vs owning"calculators to help you.
1. Univest calculator
As we've established, there's more than your mortgage payment to consider when deciding to buy or rent.
Input the fees, taxes, and monthly payments into Univest's renting vs owning calculator to help you make sense of the overall costs of both options. To view the detailed results, click the "View Report" button.
2. Schwab MoneyWise calculator
Schwab's MoneyWise renting vs owning calculator includes basic costs like taxes and maintenance costs. It factors in rent and home value increases and the rate you can earn on savings.
And it's great because it takes your personal circumstances into account such as the amount of time you expect to stay in your new home.
3. Realtor.com calculator
Realtor.com's renting vs owning calculator is also a comprehensive tool you can use to crunch the numbers and assess your options. You can check the interactive graph to see the potential value of your home at different times. Similarly, you can see how it compares if you were renting instead.
Renting vs owning: Consider all the factors
When it comes to renting vs owning a home be sure to take the factors above into consideration. You also want to consider how your decision relates to your personal finances.
Keep in mind that there is no wrong decision when it comes to whether you rent or buy. Ideally, you want to go with the best decision that works for your life.
If you are in the market to purchase, then check out our free course on buying your first home!