Renting Vs. Buying a Home: The Pros and Cons of Each
Vanilla or chocolate ice cream? Coke or pepsi? Renting or buying a home? These are some of the world’s biggest debates -- but unlike choosing an ice cream flavor or a brand of soda, the decision of whether to rent or buy could affect your financial future for decades to come.
But no worries. We’ll break down some of the major differences between renting and buying in order to help you determine what’s best for your individual situation.
The Pros and Cons of Buying a Home
While we might be slightly biased, the truth is that buying a home for yourself really does have an incredible variety of benefits. These include:
Developing home equity over time
Predictable monthly costs (especially if you have a fixed-rate mortgage)
Seeing your home’s value increase (this doesn't always happen, but often does)
Once you have home equity, you can use it to fund big expenses (in the form of a home equity loan or HELOC)
Mortgage interest payments are tax deductible for primary residences
There are other tax benefits and exemptions for primary residences, including the fact that if you sell your home, the first $250,000 of profit is tax free (this goes up to $500,000 if you’re married and filing jointly)
Despite the benefits, buying a home isn’t for everyone -- and some of the potential downsides can include:
You may have to commit to your home for a long time (though you could rent it out and live somewhere else)
You’ll be responsible for handling repairs and maintenance, which can be time-consuming and expensive
Your home may not rise in value as you were hoping
Mortgage payments are often higher than rent costs
The Pros and Cons of Renting a Home
Now that we’ve talked about the benefits of homeownership, it’s only fair that we talk about the benefits of renting. These are:
More flexibility to move at any time
Less responsibility in terms of repairs and maintenance
You can put your money into other (potentially higher yielding) investments
Your landlord may cover some expenses, like HOA dues, landscaping, trash, and general maintenance
In comparison, some of the less desirable aspects of renting a home include:
Rents can rise on a regular basis
You may have to follow rules set by a landlord (i.e. pet restrictions, number of occupants, restrictions on renovations or repainting)
You won’t develop any equity through your rent payments
You may have to move if the owner sells the home
How to Know if Renting or Buying is Right for You
While buying a home is part of the American Dream, you definitely shouldn’t do it without thinking first. Some of the things you might want to ask yourself include:
Do I have enough money for a 10 - 15% down payment? (You may need less if you’re considering an FHA, VA, or USDA loan, but it’s still wise to put more down upfront so you can start paying down principle and avoid costly mortgage insurance.)
Do I have enough monthly income to pay the mortgage for the kind of home I want to buy?
Will my income be able to cover other expenses, like HOA fees, utilities, and routine maintenance?
Do I have enough of a reserve fund to cover a few months of mortgage payments and/or unexpected home repairs?
If you’ve answered all these questions with a clear yes, you can definitely afford a home -- and you’re pretty likely to get qualified for a home loan, too, as long as you have a decent credit score and can document your income. Despite that, it doesn’t mean that buying a home is necessarily the right choice for you, personally, right now. To dive a little deeper, you should also ask yourself:
Am I willing to live in (or at least own) the home for seven years or more? (This is typically the time it takes for a homeowner to make a profit from selling their home.)
Am I willing to take the responsibility to maintain the home and keep it in good condition?
Do I seriously need this money for anything else? (i.e. starting a business, paying medical expenses, paying off debts)?
More Ways to Determine Whether Renting or Buying is the Best Choice for You
If you’ve already determined that you want to buy a home, but aren’t quite sure if buying a home is the right financial decision, there are a few tips and tricks you can use to figure it out.
The Rule of 15 Helps Compare Renting to Buying
One popular buying vs. renting metric is called the “Rule of 15.” This suggests that you take the annual rent of a home or apartment and multiply it by 15, to determine the ideal purchase price for a similar property.
For example, if you’re paying $2,000 a month to rent a home, that would end up being $24,000 a year in rent. Multiply that by 15 and you’ve got a comparable home price of $360,000. To apply this rule to help you decide about renting versus buying, you can assume it would be better to buy if you can find a similar home for $360,000 or less (i.e., with a multiplier of 15 or less).
In comparison, if the multiplier is 16 or more (i.e. a comparable home is selling for $384,000 or more), it might be better to rent versus buying.
While this rule holds steady in many markets, it doesn’t quite work in higher priced areas, like New York or Los Angeles. In these locations, homes are simply so expensive that you’d be hard-pressed to find any suitable options going for 15 years worth of rent.
Tax Deductions and Purchasing a Home
While it might sound like a minor benefit, getting tax deductions from purchasing a home is no small deal. So, when looking into whether renting or buying is better, you should also look into your income and marginal tax rate -- because the higher marginal tax rate you pay, the larger the deduction you’ll receive.
When It Comes to Buying vs. Renting, Do Your Homework to Make the Right Decision
Like we’ve said before, buying a home is an amazing journey, but you want to be confident and prepared before you make any big decisions. You’ll likely be stuck with the home you’re buying for at least a few years, so you’ll also want to make sure you’re buying the right home for you-- a place that you’ll be proud to call your own.