People often say that renting is a waste of money. Those same people also say buying a home is a good investment. But neither statement is necessarily true.
There are plenty of pros and cons for both renting and buying. In the end, the decision comes down to your individual circumstances. As you determine whether you should continue renting or look into buying a home, consider the major upsides and downsides of each.
Pros and Cons of Renting
The question of whether it makes sense to buy or rent depends heavily on your location. In some areas, rental payments can actually be more expensive than a monthly mortgage, while in other areas rent is substantially cheaper than the combined costs of a monthly mortgage, property taxes, and home maintenance. Renters insurance is also typically less expensive than home insurance.
If you want to compare the estimated costs of renting and buying in your city, you can try plugging some numbers into this calculator. In addition to the financial factor, here are some pros and cons of renting to consider.
- Flexibility: A rental lease typically only lasts for a year at the most, and if you want to leave earlier you can usually find someone to sublet (assuming your contract allows this). The process for moving out of a home you own is a bit more involved. Renting allows for increased flexibility to travel or move to a different city on a whim.
- Less responsibility: Renters typically don’t have the added responsibilities that come with homeownership, such as repairing broken appliances, maintaining the lawn, and paying fees to the homeowner’s association.
- Not at risk for foreclosure: Renters know how much they will be paying for housing each month and they don’t have to worry as much about fluctuations in area home values. For example, during the Great Recession, renters didn’t have to worry about being foreclosed on like homeowners did.
- Not building equity: Perhaps one of the biggest downsides of renting is that you’re not building equity. Every month you’re paying rent, but you’re not getting any closer to owning a significant asset that you can borrow against or use as a down payment to buy an additional home.
- You’re at the whims of your landlord: Especially if you have a difficult landlord, renting can be frustrating because you are at their mercy when it comes to rent increases, repairs, and renovations.
- Little freedom to renovate or change surroundings: If you want to paint the walls or renovate the space in any way, you will have to run that by the owner or landlord, which is a downside for anyone who has a desire to personalize their space.
- You could be impacted by economic swings: Drastic swings in the housing market can have an impact on the cost of your rental and your renting situation. For example, increases in home prices mean that fewer people can afford homes. In turn, these would-be buyers have to resort to renting instead, making the market for rentals more competitive and driving monthly rental costs up.
Pros and Cons of Buying
Homeownership comes with its own perks and downsides. Depending on where you live, a mortgage payment can be less expensive than renting. Plus, if you rent out part of the home, you could reduce your financial burden even more. However, when you consider maintenance costs, insurance, taxes, and other fees, owning a home is often more expensive than renting. Consider these pros and cons as you determine whether buying a home is a good move for you.
- Building equity: As a homeowner, every time you pay toward your mortgage you’re getting closer to owning a significant asset. You can then use that asset to borrow additional funds or as a down payment if you decide to buy another home.
- Renovate as you wish: Homeowners don’t have to run any modifications by a landlord, meaning you have the freedom to make your space your own.
- Can sometimes see a return on investment: Although you shouldn’t bank on your home making a profit, if you buy at the right time, you could see a significant increase in home value if and when you decide to sell.
- Tax incentives: Homeowners are typically able to write off portions of their mortgage interest payments on their taxes, which can significantly decrease their tax burden.
- A house is not liquid: It’s not as easy to pack up and move, or travel long-term once you’ve purchased a home. When you consider closing costs and other fees involved in the home selling or buying process, you will almost certainly lose money if you don’t live in your home for at least five years.
- You could lose money if the market tanks: As we saw during the Great Recession, if you aren’t completely confident in your ability to afford a home, there’s a risk you could lose money or even your home if the value plummets.
- Increased responsibilities: As a homeowner, you’re responsible for all maintenance and upkeep, which can be expensive, time-consuming, and physically draining. However, condos are the exception to this rule, as there is no required exterior maintenance or yard work.
- Typically not as good an investment as stocks: If you’re considering homeownership primarily as an investment, it might make more sense to invest that money in markets with a larger chance of high returns, such as the stock market.
Is Renting a Waste of Money for You?
Renting is never truly a waste of money because you’re paying for a place to live, but it could be that homeownership makes more sense for you than renting. If you’re still unsure what’s the best move for you, consider these factors:
- Your monthly housing expenses: Compare your current rent to what your monthly mortgage payments and other homeownership expenses would be in the area you’re hoping to buy. If the costs of homeownership are comparable to renting, it could be a good move to buy.
- How long you intend to stay in your current location: If you’re buying, ideally you would stay in the home for at least five years.
- How much of your current income would your mortgage eat up: Including an estimated mortgage payment, your combined monthly debts should be 36 percent or less of your gross monthly income.
- How much does owning a home mean to you: Is homeownership actually important to you or just something that other people think is important?
The intangible pride of homeownership and the comfort of having a place all your own to return to every day is certainly worth working toward. If you think homeownership is the next step for you, check out our e-book, When Renting Doesn't Make Sense Anymore, for advice from professional loan officers.