Renting vs. Buying a Home
The choice between renting or buying a home will be one of the biggest decisions we make in our lives. Each has its advantages depending on personal and financial considerations.
Common belief states that it is more beneficial to buy than rent .
“Why pay the Landlord’s mortgage when you can pay your own?”
It is better to rent when one of the following applies:
- Your rent is lower than average and is expected it to stay that way.
- You plan on moving within a couple years.
- You’re in one of the most expensive housing markets (like San Francisco or Honolulu).
Otherwise, Trulia.com says that buying is now better than renting in 98 out of the 100 largest U.S. metro areas.
Podcast: Rent vs Buy
It is better to buy when one of the following applies:
- You have the funds to put towards an investment.
- You plan to settle long-term in a particular area
- You prefer to build a home that reflects your personal tastes.
- You will benefit from the income tax deductions.
Calculator: How much will you have at retirement?
Advantages and Disadvantages
- No long-term financial commitment
- Landlord responsible for repairs and maintenance
- Flexibility with a short-term lease
- Does not require a great credit rating
- No return on investment
- No tax benefits
- Rental rate can be raised annually
- Timing of repairs, upgrades, and remodels determined by the landlord.
- Homeowner tax breaks
- Opportunity to build equity
- Ability to remodel as you please
- Responsible for all repairs and maintenance
- Value of the property could go down.
- Initial down payment can be costly
The Rule of 15
If you can buy a home in your area for less than 15-times what your annual rent is, then financially it makes much more sense to buy then to rent.
Renting vs Buying a Home
|Monthly rent||Mortgage payments|
|Utilities (water, cable, trash, power, etc.)||Homeowner’s insurance|
|Renter’s insurance||Annual property taxes|
|Homeowners Association (HOA) dues when a condo/townhouse/home is purchased in a planned development|
|All utilities, upgrades, and maintenance.|
Three important questions to consider before buying
- Will this home be the size and in the location that works for my family over the next several years?Experts say that because of market uncertainty, it’s best to stay in a home for a minimum of 3-5 years.
- Can I get approved for a loan?Qualifying to own a home depends on several factors:
- Credit Score
- Money saved for down payment and closing costs
- Low debt-to-income ratio (the amount you owe vs. what you take in each month)
Do the math, using an online mortgage calculator
- Am I ready to make such a big commitment?The stability of your financial future needs to be carefully weighed. In the event of a layoff, medical emergency, or change in income, you will need to be prepared and have the resources to cover any unplanned expenses. Also, all maintenance fees will be your responsibility as the homeowner.
If you answered NO to any of the above, it’s a good idea to continue renting until you can answer with a definite yes.
- Florida has the lowest homeownership premium, where it is only 33% more expensive to own than to rent.
- New Jersey has the highest homeownership premium, where it is nearly 93% more expensive to buy than to rent.
For more information, check out some of the links below. This interactive online calculator can help determine whether RENTING or BUYING is the best option, click here.
Real estate website Trulia offers a “Rent Vs. Buy Index” that compares the totals costs of homeownership with the total cost of renting a similar property. The price-to-rent ratio provides a comparison between owning and renting properties in certain cities, and is a great reference guide:
- Investopedia “Price-to-Rent Ratio”
- Rakoczy , Christy “Should I Buy a House Now or Wait? – 6 Factors to Consider”
- Money Crashers Web
- Roth, Marc “How Much House Can You Afford?” Bloomberg Business. Web. 8 October 2009
- Bostock, Mike, Carter, Shan and Tse, Archie “Is It Better to Rent or Buy?” NY Times, Web.
- “Renting a Home or Apartment.” Renting a Home or Apartment. USA.gov, 02 Feb.
- 2015. Web. 30 Apr. 2015.
- Nesto, Matt “Housing on the Rebound: Is it Better to Rent or Buy?” Yahoo Finance.
- Trulia.com “Buying a Home is 45% Cheaper Than Renting”