Should I Rent or Buy? Pros & Cons of Both Scenarios
Updated: April 2, 2023
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Conventional wisdom holds that owning a home is wiser than renting over the long haul. Perhaps the most important factor in the rent vs. buy calculation is the length of time you plan to stay in one place. The deeper your roots, the more logical it is to own your home. But other factors come into play: The economic health of your hometown or state, your financial discipline and your aptitude at home improvement projects, to name a few.
The Case for Homeownership
Stable Housing Payments
If you finance your home purchase with a fixed-rate mortgage loan, you will know the precise amount of your principal and interest payments for the life of the loan, whose term could last as long as 30 years. This long-term predictability fosters financial stability. If you rent, however, you'll have much more difficulty accurately predicting your monthly rent for years to come. You'll likely be at the whim of your landlord and the rental market every year.
Of course, for a homeowner, principal and interest payments are only part of the homeownership equation. Homeowners insurance premiums aren't fixed, and they can — and sometimes do — soar. Property taxes and homeowners association dues are additional variable costs. Don't forget repairs. If you need a new roof or air conditioner, you're on the hook for the replacement costs.
Nonetheless, taking out a 30-year fixed-rate mortgage means you can expect the same cost for principal and interest for 360 months, which provides considerable peace of mind. Also, if your income rises during that time, your principal and interest will dwindle relative to your overall budget.
A Home as an Investment
One of the most compelling reasons to buy is the realtor's mantra: Why throw away money on rent when you can buy a home? During the seven decades from the end of the Great Depression up to the Great Recession, that was decent advice. For the most part, home values were stable or rising during that time. During the bubble of 2005 to 2007, double-digit price appreciation meant the folks who timed the housing market just right made out like financial geniuses. Then came the crash of 2008, and home prices in many markets plunged as much as 50 percent. Now, though, prices are bouncing back. If you buy today, your home's value will likely appreciate, especially if you live in an area with a strong regional job market. However, you should never depend on rapid appreciation. Even if your home value remains steady, your home will provide another type of investment: A mortgage is a forced savings account, one that requires you to essentially pay yourself every month.
A Tax Break When You Sell
Uncle Sam wants you to own a home, so much so that U.S. income tax policy long has dangled several fat breaks to entice would-be homeowners. One longstanding break came in the form of the mortgage interest deduction. However, this loophole mostly disappeared with President Donald Trump's tax reform of 2017. Taxpayers also lost the ability to deduct property taxes every year. However, another tax break remains: You pay no capital gains tax on the profit you reap after selling your home, up to a limit of $250,000 for single taxpayers and $500,000 for married filers.
You're in Charge
Predictable monthly payments, return on investment and significant tax benefits - these are all sound, logical reasons to own a home. But they're also bloodless. Let's face it: Homeownership is quite often an emotionally charged decision, one driven in large part by lifestyle preferences. Homeownership means you are the boss and have the biggest say in your lifestyle and family decisions. Suppose your kids are in public school and you don't want to risk having them change schools because your landlord doesn't renew your lease. Owning a home would remove much of the risk of having to move. Do you have pets you don't want to part with? Apartment complexes can be finicky about dogs, cats, rabbits and reptiles, but if you own your house, you're generally the captain of your menagerie. Do you love gardening or redecorating? Need a place to store your boat? As a homeowner, you can more easily enjoy these leisure activities without worrying about logistics or restrictions.
Your Kids Will Have Stability
Researchers have found that children of homeowners tend to do better in school, spend less time staring at screens and generally have healthier upbringings compared with children of renters. Of course, there's a huge chicken-and-egg question here: Does homeownership really create better parents or is it simply that the folks who can afford homes also suffer from less financial stress? Sure, great parents can rent and terrible parents can own. In general, though, the evidence seems to bolster homeownership as a better environment for children, according to a National Institutes of Health's sponsored study that refers to the "intangible benefits" of homeownership among differing income classes.
It's Cheaper Than Renting
If you stay put in your house for more than five years, owning is generally a better deal than renting. A rent vs. buy study by the listing site Trulia found that in cities such as Miami, New Orleans and Oklahoma City, buying is nearly 50 percent cheaper than renting, assuming you stay in the same home for seven years. Even in pricey markets such as Honolulu and San Francisco, people who can afford to buy save more compared to renters. Nationwide, homeownership is 35 percent cheaper than renting. Of course, that's just an average - if your home value skyrockets, you'll do even better than average. If it plummets, you'll probably wish you had rented.
Homeownership Pros & Cons
Homeownership is a tricky decision, one that brings both advantages and disadvantages. Do you like the idea of repainting your white picket fence every five years and filling your basement with clutter? Maybe owning is for you. As you weigh your options, here are some factors to consider.
PROS
CONS
The Case for Renting
Renting Cheaper in Some Areas
In the nation's priciest housing markets, homeownership appears out of reach for many Americans. The median home price in San Francisco was $1.35 million in the third quarter of 2019 — and only 8 percent of homes sold there fell within the median-income family's budget, according to the National Association of Home Builders' affordability index. Mortgage website HSH.com calculated the numbers another way and reached an equally daunting conclusion: To buy a $1.3 million home in Silicon Valley, you need to make Google money — $250,000 a year — even with rock-bottom interest rates. If you have an average income, renting is the only option in high-cost cities.
Compare this with low-cost cities, such as Cleveland, Detroit and St. Louis, where you can earn less than $35,000 a year and afford a median-priced home. Does this mean you should go out and buy a house just because it's cheap? Not necessarily — the median home price in Detroit has fallen 10 percent over the past two decades, even as home prices in some cities have more than doubled.
Rapid Mobility at Low Cost
If you're an upwardly mobile worker in an industry that rewards or demands frequent relocation, renting can be the right call. For career-minded professionals who think they might be in Atlanta this year, Los Angeles in 2016 and Chicago a few years after that, renting offers you the flexibility to pick up and go with minimal financial penalties. In these cases, the answer to the rent vs. buy question seems obvious. "Renters can move very rapidly and get a better return to their income," says Ken Johnson, a real estate economist at Florida Atlantic University. Homeownership roots you in a place where your prospects might not be so great. Indeed, during the Great Recession, economists lamented that many workers couldn't move to areas with better job prospects because they were stuck in homes they couldn't sell. Even in a normal market, the transaction costs of buying and selling are steep — brokerage fees, closing costs, inspections, appraisals, repairs.
Not Stuck With a Depreciating Asset
The housing crash has come and gone, but the hangover remains. In some boom-and-bust markets, home prices fell by 50 percent, which wreaked financial havoc on buyers who purchased near or at the peak. Many of their homes wound up in foreclosure or short sale, hurting the former owners' credit scores and, quite possibly, draining their bank accounts. True, the housing collapse was an aberration in a housing market characterized by decades of stable, steady price gains. But the crash also proved that homeownership isn't a risk-free endeavor.
Renting Pros & Cons
No perfect solution to the rent vs. buy conundrum exists. Every homeowner experiences moments when buyer's remorse overshadows the upsides of owning, and every apartment dweller grows weary of the noisy neighbor upstairs. But if you break out in hives at the mere thought of a trip to Home Depot, you might be a renter. Here are some factors to consider.
PROS
CONS
Weighing Your Rent vs. Buy Options
Homeownership rates correlate almost directly to age: The older you are, the more likely you are to own a home, with the exception of a slight dip in homeownership for Americans 75 and older, who are prone to health problems that hamper their ability to live independently. In the first quarter of 2015, only 34.6 percent of Americans younger than 35 owned their homes, according to the Census Bureau. But 79 percent of Americans 65 and older owned homes. Low homeownership rates among young adults are an American tradition. After all, most people in their 20s have yet to marry and have kids, and they're not in their peak earning years, so they lack the motivation to buy and the ability to afford homes. For decades, Americans have followed the pattern of higher homeownership as they mature.
Homeownership Rates by Age
Source: U.S. Census 2015
But did the devastation wrought by the housing crash change young Americans' desire for homeownership? That's a topic of intense speculation and debate. Real estate economist Ken Johnson predicts the U.S. homeownership rate gradually will fall to 55 percent as Americans grow more mobile and less keen on homeownership. Others argue that the shift to "Renter Nation" is a temporary condition. With a weak job market, stagnant wages and hefty student loans, millennials aren't buying houses because they simply can't afford it, the thinking goes. "The young adult population is still digging out from the Great Recession," says Mekael Teshome, an economist with the PNC Financial Services Group. "But I don't think it's a permanent shift away from homeownership." In fact, several recent surveys revealed that millennials still have a strong desire to own homes.
Mobility Required in Your Chosen Career
If your career requires you to move frequently, renting probably make more sense. Four to five years is the breakeven point for ownership, says real estate investor Gary Carmell, president of CWS Capital Partners and author of "The Philosophical Investor." "Houses are illiquid and they have high transaction costs, so your time horizon is very important," Carmell says. Before the Great Recession, the large companies that shuffled managers from place to place every few years were willing to offer generous relocation packages. But those relocation packages have grown far stingier in the years after the financial crisis. If you're a high-level executive with a gold-plated relocation deal, buying and selling every few years might not hurt. But if you're a middle manager, renting is probably the wiser, more economical move.
Feeling Grounded vs. Being Free to Move Easily
Sometimes, intangible benefits tip the scale a certain way in the rent vs. buy question. For some, pride in ownership, although it can't be measured, is an important enough reason to own a home. For others, civic pride is a squishy concept that doesn't qualify as a compelling reason to own a home, and being free to move when they feel the need is a priority that surpasses any pride in ownership. This personal decision really is a matter of preference that comes down to individual emotions. If freedom is your primary concern, then rent. If putting down roots is more important, you should buy.
Long-Term Economic Development in Your Area
Local housing prices require some counterintuitive rent vs. buy decisions. Sure, San Francisco and New York are prohibitively expensive. But home prices across the country have risen and continue to rise. In a span of two decades, from the first quarter of 1995 through the first quarter of 2015, San Francisco's median home price soared 232 percent, according to an analysis of National Association of Home Builders data. In the New York metro area as well, prices jumped 215 percent, compared to a national average of 84 percent. In Detroit, the median home price fell 10 percent. And in Youngstown, Ohio, the median price rose 30 percent.
If you're leaning toward homeownership, you may want to avoid buying in an area where you think the economy will decline or remain stagnant in the long run; the value of your property will surely reflect the region's economic health. No growth in the economy means little or no appreciation in your home's value. So that $1 million apartment in Manhattan might seem ridiculously overpriced, but once you're in even small gains can mean a lot. "Would you rather have a 5 percent gain on $1 million or a 5 percent gain on $200,000?" asks real estate economist Ken Johnson. "A 5 percent gain in New York is going to mean a lot more than a 5 percent gain in Topeka, Kansas."
Experts Debate Renting vs. Buying
In determining whether to buy or rent, your decision-making process should look beyond convenience and on-the-spot price comparisons. You're also deliberating a long-term financial bet. How you should play it depends on your personal situation and finances. Whether you already have enough saved to buy a home or you are just at the planning stages to buy a home, consulting with a financial advisor or expert to see which option makes more sense for you is a wise move. You'll need to figure in your own time horizon and financial situation, your passions and hobbies and your feelings about homeownership. Keep in mind that a completely right or wrong answer to the rent vs. buy question rarely exists, just better and worse options depending on your circumstances.
Licensed financial advisor Ed Conarchy is the rare mortgage broker who sometimes advises clients not to buy a home. Homeownership makes sense in the right circumstances, he says. But, Conarchy argues, many homeowners rush into a buying decision. Then, when they realize they made a mistake, they're stuck paying hefty fees on both sides of the transaction. Conarchy, of Cherry Creek Mortgage Co. in Gurnee, Illinois, takes a contrarian approach to ownership.
About Jeff Ostrowski
