Buying has almost always been favored over renting when it comes to housing. For some, renting is considered “throwing money away” while buying is an “investment.” The truth is, the answer to the rent-versus-buy question is much more nuanced than this “one size fits all” approach. It’s more like “which size fits me?”
That is because cost is not the only consideration. Lifestyle, age, work situation, desired location, and readiness to settle down for the long haul are all factors that must also be evaluated when choosing a place to live.
There’s also the economy to consider. Inflation impacts the cost of rent as well as interest rates when taking out a mortgage, sometimes one more than the other. A closer look at the renting vs buying question reveals just how complicated this decision can be.
Renting a home
Renting is a normal part of everyday life. But it isn’t seen by many as a long-term solution since you actually own the place you’re living in—and you’re essentially missing out on building equity. “The cost of renting is sometimes seen as throwing money away but people rarely talk about all of the expenses that come with home ownership,” says Taylor Kovar, CEO at Kovar Wealth Management.
Although there is one benefit to renting: your landlord is responsible for insurance on the home, maintenance and repairs, property taxes, HOA fees and other costs. Although rent is often structured to cover some or all of the landlord’s expected expenses, your landlord has to calculate those costs in advance. Unexpected emergencies such as a ruptured water heater, roof replacement, or new gas line are not your responsibility.
On the flipside, you’re limited in the changes you can make to the place you’re living in when you’re a renter. Any improvements you make will benefit your landlord when you move out.
But the biggest concern among renters is the increasing costs of rent, although some experts are anticipating a slowdown. “What we see right now is that the pipeline for multi-family homes is full. There are about a million, nearly a million multi-family units that will be coming onto the market over the next year or two,” says Cristian deRitis, Moody's Analytics' Deputy Chief Economist. “That's a record high. So there should be a lot more apartments for rent soon and that will depress rent prices.”
Owning a home
Owning is just that—it’s your home to do with as you please, including remodeling, refreshing, and upgrading to suit your needs. That extra bedroom you wanted as a renter is yours, provided you can foot the bill. And when you sell the house and move, the cost of the added square footage will likely be paid back, at least in part. Even if you make no major improvements, you will get more for the home than you paid in the form of equity since most real estate appreciates in value over the years.
But getting to the “ownership” part is more expensive and complicated than renting and depends a great deal on the economy and its effect on home prices. “We project that at a national level, home prices are likely to decline somewhere in the neighborhood of 5 to 10% from their peak, which we reached in the second quarter of 2022,” says deRitis. “And so far we're down about 2% already from a peak.”
Once you locate a home, make an offer, and that offer is accepted, you must come up with a down payment, closing costs, and insurance, for starters. After that, in addition to those monthly payments, other expenses including property taxes, HOA fees, and enough savings to cover emergencies like a flooded basement come into play.
Owning involves more commitment in terms of finances, time, and labor than renting. It’s an investment and like all investments can go up or down in value. Failure to make house payments can ultimately result in losing your home and all you have invested. Failure to pay rent can ultimately result in eviction but since you don’t own the home, you don’t lose your investment.
Buying a home is not a decision to take lightly. Generally speaking it costs more to own a home, at least in the short term, than to rent. That’s why potential owners need to think about how long they will plan to stay in their newly acquired residence and whether that suits their long-term plans. “Location is the only thing you can never change about a home so you must be in love with the location,” says Sam Sawyer Founder and CEO at Pinnacle Realty Advisors.
Renting vs. owning: What’s the difference?
Renting and owning are different in almost every aspect of what it means to obtain a place to live. The responsibilities of renters are not the same as owners. The costs are not the same nor are the rewards. Lifestyles, goals, and needs often differ as well.
These differences are sometimes a reflection of the choice to rent or buy and sometimes a reflection of the reason that choice is made. Either way, the more you know about these differences, the easier your choice will be.
Monthly housing payment
Homeowner. You make a mortgage payment which is a combination of interest and principal on the loan you take out to purchase your home. In most cases, your mortgage payment is set for 30 years and does not change. After 30 years, your loan is paid off and you own the property outright. Besides a conventional 30-year-fixed-rate mortgage, you may want to consider an adjustable rate mortgage or one of several other types with different terms and features.
Renter. You make a monthly payment, called rent, to your landlord or a rental company to live in a house or apartment. This money helps pay for all the costs the rental company has including repair and maintenance. You don’t own the property. You borrow it for a month at a time. In order to remain where you are, you must continue to pay rent, which typically goes up on a yearly basis.
Mortgage interest
Homeowner. If interest rates go down you have the option to refinance your original loan and lower your house payment. You can also deduct interest payments on your taxes each year.
Renter. Since there’s no loan involved, you cannot “refinance” your rent payment and rent is not a deductible expense on your income taxes.
Property taxes
Homeowner. You pay local property taxes to the taxing authority which you can deduct when you file your income taxes (up to $10,000). If you fail to pay property taxes, you can have a lien taken on your property and eventually lose the property to foreclosure.
Renter. You don’t typically pay property taxes directly although your landlord may stipulate you do so as part of the lease. If so, you can deduct that amount on your income taxes, just like a homeowner can. Most often what happens is landlords include taxes and other costs when calculating the amount of your rent. Those costs are not deductible by you. Some states have a renter’s credit you can deduct that takes into account taxes you pay indirectly. Importantly, as a renter you cannot lose the property due to failure to pay taxes since you don’t own it in the first place.
Maintenance
Homeowner. You bear the cost of maintaining the home you own. This could include anything from replacing a roof, buying a new water heater, and repairing a damaged driveway. If something breaks down, as the homeowner you have to fix it.
Renter. You are not responsible for maintaining your house or apartment when it comes to replacing owner-provided appliances, fixing plumbing issues, painting, or remodeling. As with taxes, your rent may include the landlord’s estimate of the cost of maintenance but in the end, the landlord is legally required to maintain the property.
Insurance
Homeowner. Homeowners insurance has to cover the dwelling including damages caused by water or fire and all of your personal belongings. It must also provide liability coverage. Because homeowners insurance has to provide so much more coverage than renters insurance it can cost up to eight times the cost a renters policy.
Renter. Renters insurance is less expensive than homeowners insurance because it only covers the cost of your personal property, not the building where you reside. It also includes personal liability insurance in the event someone is injured on the property and it is your fault.
Equity
Homeowner. Since you own the home, any appreciation in value (equity) is yours. Most homes rise in value over time though, like all investments, can also fall in value. When you sell the home, you can cash in that equity as profit. You don’t have to wait until you sell to take advantage of equity, however. You can borrow on the equity you have accumulated through a variety of loan options including a home equity loan, home equity line of credit or HELOC, or a cash out refinance of your mortgage loan.
Renter. You don’t earn equity (or lose it) because you do not own the home or apartment where you live. Equity, or the increase in value a home receives over time, only goes to the person who owns the property.
Lifestyle
Homeowner. If you like the area where you live, are generally ready to settle for at least three to five years, put down roots, and keep the same job, being a homeowner may be a good fit for you.
Renter. If you long to live elsewhere, lack job security, are not ready to stay in place for at least three years minimum, renting may make more sense for you right now.
Peace of mind vs. flexibility
Homeowner. When you own a home, it can’t be sold without your permission (provided you keep making payments on time). If this peace of mind resonates strongly with you, homeownership may be calling.
Renter. Renters trade the peace of mind ownership brings with the flexibility to easily move to another location. As long as that flexibility is important to you, renting may be a better choice, at least for now.
Finances
Homeowner. To buy a home, you need to employ a lot of financial leverage. Your 20% down payment and good credit score become the leverage that gets you a loan for a property worth many times the amount you shell out. To have that leverage your financial house needs to be in order. You need that down payment, good credit, solid employment, and the financial wherewithal to make house payments on time for the foreseeable future.
Renter. The financial standards for renting are not as strict for renters, but they aren’t non-existent. To rent a home, you need the amount of the deposit, good credit, and the ability to make rent payments on time.
The costs of renting vs. owning
The cost of renting vs owning depends largely on how long you stay in the same house assuming economic factors follow historic trends.
For example, say you can’t decide between buying or renting a $300,000 home. Your main concern is cost. In other words, is it cheaper to buy or rent?
The table below shows how much money you need for either scenario. For example, if you buy, you will need a $60,000 down payment and $12,000 in closing costs upfront. Renters don’t pay closing costs but they do pay a deposit typically one or two month’s rent.
The table shows both your initial and first-year costs as a buyer or renter. Not counting your down payment and closing costs, they are similar. To recover the down payment and closing costs, you need to hold the house long enough to sell it for enough profit to pay off the existing loan plus costs and fees associated with selling.
Depending on the housing market and economic conditions, this typically happens between years 3 and 5 of home ownership. That’s why experts urge you not to buy unless you plan to live in the home at least that long.
The table does not consider losses or gains you might realize by, for example, renting instead of buying and investing the $72,000 down payment and closing costs in the stock market. Some retirees do that when they sell their home in order to downsize.
Below, we compare the first-year costs of renting vs. buying a home in Maryland.
View this interactive chart on Fortune.com
Other factors
As noted, cost is not the only factor to consider when deciding between buying and renting. Some factors are obvious such as financial readiness. Simply put, if you don’t have enough funds for a required down payment, an emergency fund, or have a poor credit score, your best recourse for now at least may be to rent.
“Your credit score is an important factor in purchasing a home since a high credit score, low debt, and stable finances equate to a better interest rate,” says Chris Pickrell at Silverton Mortgage. “But there are many loan programs, such as FHA, VA, and USDA loans, that were created to work with you despite not-so-stellar credit.”
Another important factor is location. Where you are right now may not be where you want to be in 3 to 5 years or more. If your time horizon is more than 5 years away, you may be safe buying since chances are it will be less expensive than renting over the same period.
The state of the housing market and housing availability can both be big factors when it comes to the rent vs buy decision. If prices are sky high and going higher, you may want to wait (rent) until prices come down. The same applies to interest rates. On the other hand if homes to rent are scarce, you may be better off buying, even if you don’t expect to be in the area long.
“Even if you buy and decide that the benefits are not what you had hoped for, you can rent out that property and potentially earn passive income off of it while you are renting elsewhere,” suggests Eddie Martini, Strategic Real Estate Investment Advisor at Real Estate Bees.
“The theory that owning a house is a core pillar of your retirement plan comes from the standard lifescript that says you get married, buy a house, have kids, retire, and so forth,” says Jay Zigmont, certified financial planner and founder of Childfree Wealth. “When you are following a different lifescript, it is OK to challenge base assumptions, including buying a house. When you are a bit more nomadic or have a wanderlust, renting is likely to save you money as you won't have closing costs and the challenges of owning a home.”
Should you buy or rent? Questions to ask yourself
So, should you buy or rent? Here are some questions to ask yourself.
How long do you plan to be where you are now?
This is a very important question. If you and your family do not plan to stay where you are longer than 3 years, you would be better off renting for now according to most experts. If you are not sure, the pointer still leans toward renting. If you are committed to at least 3 to 5 years or more, it’s probably in your interest to look into buying.
What are your finances like?
This question is not in the wrong place. Most experts say tenure is the most important factor when deciding between renting and buying. Your ability to finance a home purchase is critically important but there is such variability when it comes to financing options, it’s more important to know whether you will be in place long enough for finances to matter.
What is the state of the housing market where you live?
All real estate is local, just like politics. If you live in Indianapolis, the lack of affordable housing in San Francisco isn’t important to you. The same applies to everything from interest rates to flood insurance to cost of construction. Examine availability, prices, interest rates, even housing regulations where you live. If everything checks out and you are otherwise ready to buy, go for it.
What about job security and satisfaction?
One last thing. If you like where you are but hate your job or, worse yet, are unsure about your continued employment, you may want to focus on that before considering settling down. If employment isn’t an issue because you’re retired or independently wealthy, this question doesn’t matter. There are actually a number of reasons this question might not be a major concern. There may be plenty of other jobs available. You may be near retirement. You may be willing to stick it out for at least 3 years—remember, under most conditions that’s all you need.
Consider your answers to these questions before deciding. Not much in life is all one way or the other. You may not be 100% sure you will be where you are in 3 years, but who is? Your financial situation may seem precarious to you but not to a loan officer. Conversely, you may think you’re in great shape but haven’t considered something you didn’t know was in your credit report.
The takeaway
The decision to rent or buy is far from a simple matter of which is less expensive. Everything discussed here plays into your final decision which can range from buy now to wait and rent to rent for life.
Tenure, finances, location, housing availability, interest rates, job security, and so much more are all a part of the decision-making process. The one thing you shouldn’t do is rush into anything, especially buying since it is a much more complicated process.
Give yourself time to go through all the elements, conduct research, and get to know yourself and your life goals. If all else fails, Real Estate Bees’ Martini suggests this:
“Try out both sides of the fence and then you know what suits you best. Some may be totally happy renting for the rest of their life while others can find that same happiness being a homeowner. If you have not tried both, how would you really know what’s best for you?”
