Is It Better to Rent or Buy a Home? Here's How to Know Which Path Is Best for You
There are a number of major life choices that often feel predetermined—even though they are, in fact, choices. For example, take the common trajectory of getting married, buying a house, and having kids. While the norms around the marriage and kids part have long been shifting and expanding, the pressure to buy a house to fulfill not only life but financial goals can still be pretty strong.
However, everyone is different, and like every other major life choice, the decision to rent vs. buy property deserves careful consideration. So we tapped personal finance experts to help us navigate the often intimidating decision process. Keep reading for everything you need to consider and all the tough-but-necessary questions to ask yourself when deciding between being a homeowner or renter.
How to Know When to Rent vs. Buy Property
Get Real About What You Want
You may have heard the common warnings that renting is wasting money, or that owning a home is the only way to build wealth. However, these arguments are conditional, and it's important to cut through the noise to determine what you value most in your life. If you're considering whether you want to rent or buy your next home, Marsha Barnes, a certified financial social worker, recommends getting a notepad and writing down some big questions. For example, ask yourself: Do I want to move states in the near future? Do I plan on extending my family? Do I want to work from home full-time or work in person? "Some of these may not be answers that you have readily available, but it's definitely important for us to take these little soundbites or voices that we hear [about renting versus buying] and then drill it back down to what this means for our lifestyle as individuals," Barnes says.
Ultimately, it's important to ignore the rules about what others say you "should" be doing and just focus on what you want. "There is no one-size-fits-all approach to where you live and how you pay for it," says Andy Taylor, vice president and general manager of Home & New Ventures at Credit Karma.
Determine if Your Lifestyle Is Better Suited to Renting
Many financial experts challenge the blanket statement that "renting is a waste of money." As Barnes says, "If [renting] provides you with a roof over your head and a place to live, all of us have to have that, so it's definitely not a waste of money." Taylor agrees, saying, "It all comes down to what you can afford and where you're at in your life."
For someone who's still saving for a down payment, or someone who doesn't want to manage the upkeep of the property the way a landlord will, Taylor says that renting is a great option. "Or maybe you're exploring a new city or trying out how a new neighborhood feels," he says, explaining how that's just as valid a reason to continue renting. Sometimes, the flexibility that renting can afford you to live the life you want is more than enough to make up for what you're paying in monthly costs, he explains.
Crunch Some Numbers
If your goal in deciding to own or rent a home is to take the most cost-effective route, then it's important to compare all the numbers involved. Sometimes, it's true that purchasing a home can save you money on your monthly expenses. "You may find that what you'll pay on a monthly mortgage is less than what you'd pay in rent for a comparably priced space, even as you're building equity," Taylor says.
However, that widely circulated argument that renting is throwing away money can also be applied to certain situations of homeownership. "The return in the stock market on an investment has averaged at about 10 percent year over year," says financial expert Shang in this week's episode of the Money Confidential podcast. "According to Zillow, the average annual growth in home prices has been 4 percent a year. If I'm talking to an average person who's considering putting money into the stock market versus trying to build equity slowly into a home, I just look at those two numbers and I say that doesn't match up. You're actually throwing away more money by buying that house."
(Get the full transcript of this week's Money Confidential podcast here.)
Consider Whether You're Ready for the Responsibilities of Home Ownership
The vision of having the keys to your very own home can be a beautiful thing—but that vision doesn't often include all the upkeep and expenses that come with it. "You also have to remember that owning a home comes with more than just the sticker price—things like property taxes, maintenance, and utilities add up," Taylor says. If you're not ready to be (or interested in being) solely responsible for all the upkeep of your home, then continuing to rent may be a better option for you.
However, Taylor says, "There is something truly special about your own patch of dirt, being able to paint the walls or install a dog door through the wall that has its own appeal." If these things sound like a dream of yours—and you're ready to take on all the less-glamorous aspects that come with that dream—then it might be time to think more seriously about buying a home.
Assess Your Financial Standing
Say you've decided you're ready—based on your lifestyle and your personal goals—to own a home. That's great, but there's much more to be done before it's time to start shopping for houses. "Getting your finances in order should always be the first step in your home buying journey, and it's never too early to start," Taylor says.
Taylor recommends that wannabe homeowners ask themselves these questions to assess their financial standing: Are you secure in your job? Do you feel confident you're in a position to continue earning a steady income? How's your credit? Are you underwater on high-interest debt?
While the answers to these questions won't determine a definite yes-or-no answer to whether you're ready to buy a home, they can provide a map for what you need to do to become more financially ready. Barnes is also a proponent of calling in help from an expert. If you don't feel confident analyzing your own financial readiness to be a homeowner, she recommends meeting with someone like a mortgage lender, because they can provide you with a checklist and help you create a plan for yourself.
Consider Your Location and Willingness to Move
Sometimes, you might be emotionally and financially ready to own a home—just not in the place you're currently living. For example, you may be more than ready to afford a home in a state like Michigan, but the same (or less) amount of real estate could cost you upwards of a million dollars in a big city like New York or Los Angeles. So if you're living somewhere where buying a home would be out of your range, you'll have to ask yourself whether the dream of owning a home is worth moving, or if it's more important to stay where you are and continue renting.
Consider Renting and Buying
Sometimes, you don't have to pick just one option. If you're financially ready to buy a home somewhere but aren't ready to give up your renter lifestyle in a more expensive city, it may be worth considering buying a property elsewhere and continuing to rent where you are. As Barnes explains, buying a property to live in yourself isn't the only option. You can also invest in a home to rent it out, creating another income stream for yourself and building equity in a property, while also renting your own home.
To Shang, buying a property to rent it out can offer a much better return on investment than simply buying a home to live in. "If you pull back, you look at the investing portfolios of people in much higher net worth stratospheres, the bulk of their net worth does not sit in homes that they live in, but it can be in real estate that they rent out," she says on the podcast. "And that's a key difference for me. I've come to learn that a home is an investment if I'm a landlord, but if it's a home that I live in, there are so many costs on top that basically you throw your money away at that. That is the hidden cost of homeownership that a lot of first-time homebuyers are not aware of."
Determine Which Choice Will Best Set You Up for Future Success
One of the most common arguments for homeownership is the opportunity to build equity on your home. However, as discussed, owning a home doesn't always offer the best return on your money, so it's important to be smart about your choices—not just follow the most popular trajectory.
"There's so much emphasis on, 'you're not an adult until you're independent and in your own home,'" Shang says on the podcast. "But I would also say adulting means being responsible with the money that you have and the assets that you have been given and being able to take care of your future self through your retirement plans, your retirement funds, [and more]."
Shang continues, "If owning a home actually prevents you from taking care of your future self, then that's not adulting, that's digging yourself a hole that's going to be very difficult to climb out of."