Renting or Buying a Home: The debate over renting vs. buying a home is as old as the country itself, and there are valid points on all sides. For decades, owning a home has been regarded by many Americans as the cornerstone of the “American Dream”, but the economic facts around today’s housing market have forced many would-be buyers to think outside the box when it comes to homeownership. A new analysis by Today’s Homeowner puts numbers behind this debate, determining that renting in the long-term is cheaper than owning in 46 of 97 major U.S. cities.
For example, renters will on average pay $1.26 million in 30 years, while owners will pay $1.30 million over the same period. This is because home prices have risen faster than almost any other cost in the nation; combined with typically high down payments and interest rates, purchasing a home has become alarmingly unaffordable for many Americans.
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Renting Provides More Flexibility and Lower Upfront Costs
Another major advantage of renting is flexibility. Residents of rentals are much more apt to move from place to place. They are free to take employment, live closer to family, or just want to experience a new area. Homeowners, generally speaking, are tied to a specific property and must withstand the painful transactional costs to dispose of their asset.
Substantially lower initial financial costs are another benefit to renting. For renters, there are really only two major initial costs; the rent under the lease and in some cases a security deposit equivalent to one month of rent. For buyers, typically a down payment equivalent to 20% of the price of the home is required. For many homes this can be tens of thousands of dollars. This down payment is a major barrier to homeownership for many individuals especially first time and younger buyers.
Homeowners Face Higher Ongoing Costs
In addition to the initial costs, homeowners will also typically incur substantially higher ongoing costs than renters. Homeowners must pay for property taxes, homeowner’s insurance, upkeep and repair, and various other costs that renters do not have. Property taxes can easily run into the thousands of dollars per year, and are based primarily on the value of the home and location of the property. Homeowner’s insurance is also a necessary expense, and can easily add another few hundred dollars or more to annual costs. And when something needs to be repaired, a homeowner must pay for those repairs – which can range from a few hundred dollars for a new furnace to 10’s of thousands of dollars for a comprehensive remodel or addition.
Compare this to renting – the renter is only responsible for the actual rent, and do not have these additional expenses that come along with homeownership. This can lead to considerable savings over time.
Renters Have Access to Amenities
Another financial advantage of renting is the amenities that would otherwise cost a fortune if purchased by the homeowner. Many apartments and rental communities offer pools, fitness centers, and various other amenities that would be very expensive for a homeowner to install and maintain. But the renter has access to these without paying the additional cost.
Homeowners in condominiums do have some of these amenities available to them, via their homeowners association (HOA) fees. But these HOA fees can sometimes be quite expensive – often amounting to hundreds of dollars per month. Renters do not have this HOA cost.
Renting May Be Cheaper Long-Term in Some Markets
The Today’s Homeowner study concluded that in 46 of the 97 major cities they analyzed, it was less expensive to rent versus buy a home over a 30 year period. This was especially true of several major California markets, where the study showed renters would accumulate a savings of over $900,000 versus the homeowner.
The results of this study suggest that the long-held belief that owning your own home is the more economical option is no longer valid in many areas of the country. With home prices and mortgage rates both trending upward, the shorter-term proposition for many homeowners would be to rent, at least for the next few years.
Of course, all of these calculations are estimates and averages, and each individual’s situation can vary widely. But the numbers suggest that for a large percentage of the population of the U.S., renting may be the more economical option.
Homeownership Still Has Advantages
Of course, there are many benefits to homeownership that should not be discounted. Probably the largest advantage of owning a home is the potential for accumulating home equity and wealth over time. As a homeowner works to pay off their mortgage, they accumulate equity in their home, which can later be accessed via refinancing , or simply passed on to their heirs.
A homeowner is also free to make alterations and improvements to their property at will, whereas a renter is typically restricted in what they can do to their rental. This can be especially enticing to those who enjoy making a house a home.
In addition, the mortgage interest and property tax portions of homeownership are tax-deductible, which helps to offset those costs. Renters have no such tax advantages.
Renting May Be Better for Some Lifestyles
Choosing to rent or choose to buy a home is a personal decision which ultimately depends on your situation and preferences. For some, the flexibility of not being responsible for maintenance or not being tied down to one property is enough to not desire owning a home some day. If this is the case, and you do not have the funds to pay the down payment and costs associated with owning a home, then renting could be the best option for you. Youthful adults, people in the beginning stages of their career, or those who do not anticipate remaining in the same location for many years to come, all have reasons to rent instead of buy. They can more easily accommodate changes in their lifestyle without the burden of a particular property.
However, for homeowners who wish to settle down, have secure employment and income, and have the funds for a down payment and future expenses, buying a house could be the most advantageous option in the long run
The Rent vs. Buy Decision Requires Careful Consideration
Ultimately, there is no correct answer to the question of whether it is better to rent or to buy. Both options present advantages and disadvantages, and the best choice is dependent on the individual’s financial situation, lifestyle, and future plans.
Those who are thinking about buying a home should run the numbers and consider not only the mortgage payment, but also the other expenses associated with owning a home, including property taxes, insurance, maintenance, and eventual repairs. Renters should also think about not only the near future but also the future after their lease is up when considering if renting fits into their financial strategy.
At the end of the day, deciding whether to rent or buy a home is an extremely personal decision and all the variables are weighing the costs, advantages, and lifestyle of each option, any prospective homebuyer or renter can make the choice that is best for them.
