Is Renting Better Than Owning—for You?

It’s no secret that keeping a roof over your head can get expensive quickly. On average, households spend over a quarter of their household income on housing costs each year, according to the

Renting Is Better Than Owning

Benefits

•     Locked-in payments: When you sign a lease agreement, you know exactly what you are expected to pay for the duration of the lease. That’s a big contrast to homeownership. Although homeowners usually have a stable principal and interest payment, changing home insurance premiums and tax liabilities can lead to higher costs.
•     Potentially lower payments: In some markets, rent payments are lower than comparable mortgage payments. While this isn’t always true, it can be a useful advantage for renters in some areas.
•     Utilities: Depending on your landlord, the cost of utilities might be included in the rent payment. With that, you may not have to juggle multiple bills to keep a roof over your head and the lights on.
•     No maintenance responsibilities: The cost of maintenance and repairs falls squarely on the property owner’s shoulders. As a renter, you can call your landlord to fix any problems with the property. For example, you won’t have to pay for a new roof or pay for a plumber to fix the pipes.
•     No property taxes: As a renter, you won’t be directly responsible for property taxes. Instead, the property owner will need to cover this fluctuating cost.
•     Easy relocation: If you need to move across town or across the country, it’s relatively easy to leave your rental behind. When your lease is up, usually after a year, you won’t be responsible for future payments. You can leave without going through the process of selling the place.
•     Achievable credit requirements: In many cases, landlords offer more lax credit requirements than mortgage lenders.

Drawbacks

•     No equity: The most obvious downfall of renting is that you won’t have a chance to build equity with your monthly housing payment. Instead, your rent check is sent to your landlord.
•     Missed tax incentives: Homeowners can take advantage of some tax incentives that renters cannot access.
•     Variable housing costs: In general, renters only lock in their housing costs for a lease term, which is often a year long. After the lease ends, renters often face higher rental costs.
•     Restrictive lease agreements: It can be difficult to make a place feel like home if your landlord doesn’t allow you to make holes in the wall to hang pictures or repaint to a color that suits your tastes.
•     Rent payments don’t always build credit: Rental payments don’t automatically build credit because they aren’t reported to the credit bureaus unless you enlist the help of a specialty service. In contrast, on-time mortgage payments will help build your credit score.

Kinds of People Renting Is Best For

•     You want location flexibility: If you are just starting out or trying to reposition your career, location flexibility might come in handy. For example, you could move for a job in a different city with less financial stress if you don’t have a mortgage tying you to your current residence.
•     You aren’t sure what you want in a long-term home: Homeownership is often a years-long commitment to a property. If you aren’t sure what you want in a home, then consider renting while you figure that out.
•     You live in a very expensive housing market: In some parts of the country, home prices might put the idea of homeownership out of reach. If you cannot comfortably afford to purchase a home, then renting is the right play.
•     You have a bad credit history: Mortgage lenders often require borrowers to have a good credit history. If you have a bad credit history, homeownership might not be an option until you rebuild your credit.
•     You prefer to build an investment portfolio through other assets: Real estate is one type of investment asset. But it’s not the only option available. For example, you might choose to invest in index funds or precious metals but avoid the real estate market. If you choose to rent, you could funnel more funds into these other investment classes.
•     You don’t want to deal with home repairs: Homeowners have to deal with unexpected repairs and perform regular maintenance on the property. If you are opposed to dealing with home maintenance, and the associated costs, renting might suit you better.
•     You don’t like the risks tied to real estate: Real estate prices can fall. If you are uncomfortable with the risk associated with potentially falling property values, renting presents an option to eliminate that risk.

Owning Is Better Than Renting

Benefits

•     Historically a good investment: In the past, rising housing prices have made homeownership a worthwhile investment for many owners.
•     Build equity: With each mortgage payment you make, you’ll chip away at the loan balance. This means you’ll build equity along the way.
•     Can pay off the loan: Eventually, you can pay off the loan to live without a mortgage payment. However, you’ll still be on the hook for home insurance and property taxes.
•     Equity is a valuable tool: You can also build equity as your home gains value. With enough equity, you can tap into your home through home equity loans to cover significant purchases. For example, you could use a home equity loan to pay off credit card debt or wipe out your auto loan. At some point, you could even choose to sell the home to fund retirement expenses.
•     Build credit: If you make on-time mortgage payments, this will help to improve your credit scores.
•     Total control: As a homeowner, you are completely in charge of the space. With that, you have the ability to redesign the space to suit your needs.

Obstacles

•     Down payment often required: Most types of home loans require a down payment, meaning you’ll need to pay thousands of dollars upfront.
•     Interest rates: When you borrow money to purchase a home, the lender requires you to repay the funds with interest. In recent years, interest rates have been on the rise. Although you can work to pay off the loan early to eliminate some of your interest charges, interest can take up a big portion of your housing budget.
•     Closing costs: In addition to a down payment, most home buyers face significant closing costs to finalize the loan. For most, this involves thousands of dollars, which won’t go toward building equity.
•     Insurance: If you purchase a home with a mortgage, you will likely be required to purchase a homeowner insurance policy. Additionally, you might need to pay for private mortgage insurance if you made a relatively small down payment. Both types of insurance add to the costs of owning a home.
•     Utilities and taxes: As the homeowner, you are responsible for all of your utility bills and property taxes. Sometimes, you can use an escrow account to roll these costs into your monthly payment.
•     Requires good credit: Most lenders require home buyers to have good credit scores. Without good credit scores, you might face a rejected application or higher interest rates.
•     Existing debt: If you have a lot of existing debt, it might be difficult to obtain a home loan. Most lenders prefer to work with borrowers who have a limited amount of debt.

Kinds of People Buying Is Best For

•     You are committed to your location for the long term: If you are committed to living in the same location for at least five to seven years, then purchasing a place to call home might be the right fit. You can lock in a place and have the ability to make changes that suit your style.
•     You are in a solid financial position: If you have the cash on hand for a down payment and room in your budget to cover a monthly payment, that’s a good place to start. Ideally, you’ll also have a well-stocked emergency fund before you dive into homeownership.
•     You have a good credit history: A good credit history can help you lock in a great mortgage interest rate.
•     You are comfortable with maintenance costs: Homeowners should expect to deal with surprise repairs. If you are prepared to handle unexpected costs, you might be ready for homeownership.
•     You want to build a real estate portfolio: Purchasing a primary residence is one way to dip your feet into the world of real estate. If you want to invest in real estate as a part of your retirement plan, then jumping into homeownership might make sense.

Takeaway: Housing Timing Can Be Everything

FAQs

Is It Smarter to Rent Than Buy?

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