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Rent Vs. Buy: How To Calculate And Decide Which Is Right For You

Carey Chesney6-Minute Read
December 01, 2020

To rent or to buy? That is the question. Most Americans face this choice at more than one point in their life and it often results in myriad financial, societal and emotional factors swirling around in their heads. Should it be part of my “American dream” to own a home? Can I afford it? Do I want the responsibility of caring for a house? Is buying a house really a great investment? Is renting really considered throwing money away?

It’s a lot to take in but understanding the pros and cons of the rent versus buy conundrum and how they relate to your particular situation can give you confidence in whatever path you choose.

Examine The Pros And Cons Of Renting And Buying

Make a list and check it twice when it comes to this important life decision. Once you have written down all the pros and cons and weighted their importance as it relates to your specific situation your desired path will become a little clearer. Let’s dive into some information that will help you make your rent vs. buy pros and cons list and make an argument for both renting and buying.

Why You Should Rent

Again, everything is specific to your unique situation, but the age-old tenant that buying is always better than renting is simply not true. Sure, owning a home means building equity each month instead of spending money on rent that you won’t get back, but there are a few key drawbacks as well. Here are a few of the reasons why renting might be better than buying:

  • The additional costs of owning a home: Comparing your monthly rent to a mortgage payment estimate on a house you may be interested in might make buying seem like the smarter move. However, once you factor in homeowners insurance, property taxes, closing costs, mortgage interest rates, maintenance – figure 1% of the value of the house per year for this one – and a slew of other surprise costs (new furnace, water heater, etc.) buying might make less sense.
  • Maintenance: In addition to the cost of maintaining your home, consider the effort and time it takes. Don’t like cleaning gutters or remembering to replace the furnace filter? Renting has the benefit of just picking up the phone to take care of these pesky tasks.
  • Mobility: Not sure what the next 3 years look like professionally? Kindred spirit who loves the idea of moving to Sweden for a year? Renting allows you to get up and go much faster than having to sell your home.
  • Relationship flexibility: For unmarried couples, renting allows for a cleaner break – in terms of housing at least – if things don’t work out. While it’s no fun for someone to have to move out of an apartment you’ve become accustomed to sharing, it’s nothing compared to the litany of legal and financial entanglements that selling a house during a separation can entail.

We covered some of the additional costs of owning versus renting already but add on to that coming up with cash for a down payment (20% of the value of the home if you don’t want to add on mortgage insurance to the list of expenses), and renting can often be more affordable. Also, the assumption that homes will always go up in value and bring that coveted equity you seek is not always a safe one. If you buy in a market or area when property values are stagnant or declining, buying instead of renting can actually be the route to throwing your money away.

Why You Should Buy

Many people make the argument that renting is just throwing your money away. After all, once that check goes to the landlord, that money isn’t coming back. In contrast, when you pay your mortgage every month, you are building home equity that will bring that money back when you sell, refinance, or take out a home equity line of credit (HELOC). In addition, while renting may seem like the smart choice when it comes to affordability at first glance, there are a number of costs you may not be factoring in, like renters insurance, application fees, security deposit and pet deposits.

Factors To Consider When Calculating Buying Costs and Rewards

Here are some specific factors you should consider when comparing the financial cost of renting vs. buying:

Length of occupancy

Have you found your forever home? Or maybe just the starter home to move you closer to your final abode? How long you plan to stay in your house is a critical factor when deciding to buy or rent. The longer you stay, the more equity you will build paying off your mortgage while enjoying the possibility of your home appreciating in value. Real estate can be one of the most lucrative investments you will ever make, but it can take some time. Thinking you may only be in your next home for a year or two? Maybe not time to buy. Feeling like you will be there for 5 years or more? Pull the trigger on buying.

Tax savings

To put it simply, buying a home can save you some serious dough when it comes to  your taxes. You can generally deduct your mortgage interest and real estate taxes when that tax bill comes around every year. In addition, receiving a Mortgage Credit Certificate (MCC) from your state or local governmental means the mortgage interest credit can directly reduce your tax liability.

Investment risk vs. Reward

Investing in real estate can often bring the biggest financial gain of your lifetime. Almost any house in the country bought 30 years ago and paid off has brought the owner significant financial gains through the equity in their home. In addition, your home can be a major contributor to maintaining your lifestyle when you stop working, as it is usually the biggest asset you will have when you retire. Just make your house payment every month, build that equity, and consider yourself a savvy investor!

Savings

Saved your pennies for a while and ready to make that down payment? It’s time to buy! Not quite ready and need to squirrel a few more nuts away, it might be best to wait a bit. Keep in mind though that sometimes a mortgage payment will be less than what you are currently paying in rent. In that case, you can investigate low or no down payment loans and get to buying ... and more saving.

Likelihood to get mortgage approval

A number of factors go into getting  preapproved/approved for a loan, including your debt to income ratio, employment status and credit score. If these factors are in your favor, buying can be a great option over renting.

Do The Math

Like so many life decisions, this all comes down to your specific equation – so to speak. There are a myriad of online tools like this rent vs. buy calculator that allows you to input what home price and down payment you are comfortable with and how that compares to your desired monthly rent. The calculator then shows you how much you would save (or not) by renting instead of buying. It also will determine the appreciation and equity you will build, showing your true home value over time. The final analysis will let you know how long you would need to stay in your home before selling to ensure a net gain when it comes to rent vs buy. Pretty sweet, right?

Is Renting Or Buying Better For You?

One of the first questions people often ask when they are thinking of moving is “Should I rent or buy a house?” This usually results in an introspective, in-depth look at what drives their lives, what they see for the future, and how they plan on achieving their goals. If you’ve started – or are excited about starting – a family and digging deep roots in a community, buying may be the right path. If you like the freedom to get up and go at a moment’s notice to chase adventures and opportunities, renting may make more sense.

If you like the notion of fulfilling the “American dream” and see owning a home as a critical tenet of that goal, you’d probably lean toward buying. If you hate doing any type of house maintenance beyond cleaning, you sound like a renter. Owning a home is a big step, and certainly more of a commitment than renting, so if you dig into these big life questions and are not sure of your answers, rent for at least a little while until your preferred path comes into focus.

So, is it better to rent or buy? From mortgages and rent payments to maintenance and mobility, there’s a lot to consider and it can sometimes seem overwhelming. But now that you’re well versed in the renting versus buying conundrum, you’re ready to make an educated choice.

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    Carey Chesney

    Carey Chesney brings a wealth of real estate sales and marketing experience to his buyers and sellers as they navigate highly competitive markets. Carey and his wife Ilze work together as Realtors® in Michigan.