This is one of those age-old questions: is it smarter to rent or buy a home? My wife and I consider this all of the time as we live in the second home that we’ve rented since getting married. In my adult life I have rented 5 different homes, three of them post-graduation. Renting is becoming a more frequent thing in the United States than ever before, although ownership is still the more popular choice. I have many friends whose goal it was to buy a house as quickly as possible, many of whom have succeeded. I hear all the time about how much better it is to purchase a home, some reasons of which I will cover below. The truth is that there is no one-size-fits-all answer to this question. Whether you choose to rent or buy your home should depend on your individual circumstances. If you’re trying to figure out which approach is best for you, I suggest you ask yourself the following questions:
Do You Expect to Be Moving Soon?
Mobility should be a big part of your decision to rent or purchase your home. Do you expect to be moving in the next 5 or so years? If you do then the most cost effective option would probably be to rent. Moving in and of itself can be a very expensive endeavor, and you don’t want to add onto that with the costs of selling your house. Selling a home can include many fees such as closing costs, commissions, staging costs and repairs. If you’re renting the only thing you might have to worry about are the costs of any repairs to your unit. On the other hand, if you’re not planning on going anywhere anytime soon then home ownership may be the right path for you.
Do You Have a Decent Emergency Fund Available?
I had a coworker last year who was very excited to buy her first house. She ended up buying a decently priced property that was right at her max budget after closing. A few months later I asked how the new house was working out and was told quiet a story. Within several weeks of closing the HVAC unit completely shut down due to wear and tear. For various reasons the warranty didn’t cover it, and she was forced to replace the HVAC system completely out of pocket. The final costs amounted to a couple thousand dollars.
My family and I moved into our new rental home last spring. Since then the washing machine has sprung a leak, a light switch came out of the wall and a swarm of wasps made their home in our air conditioning unit. Can you guess how much I spent to get these revolved? Not a single penny. As a tenant I instead reached out to the property management office and put in a work order to get these things fixed. A maintenance guy came over and presto, problem solved.
One thing you need to keep in mind if you’re going to purchase a home is this: you are your own landlord. If something breaks down like it did for my coworker, unless your insurance or warranty covers it then it is completely on you. This is why it’s critical to make sure that you are financially fit enough to absorb the risks that come with owning your home. A rule of thumb is to be prepared to spend 1% of your home worth every year. That means if you own a $250,000 home you should be able to spend $2,500 a year on home maintenance. If you don’t have the ability to absorb these costs then you should go the safe route and rent until you’re able to build a strong emergency fund.
Can You Afford a Strong Down Payment?
You do not need to have a substantial down payment or even one at all to purchase a house these days. There are programs and loans that do not require you to put any money down. I know a few people who have taken advantage of this when purchasing their homes. While buying a house is an amazing thing, I do not recommend doing it this way. While you might save money in the short term by not having to produce tens of thousands of dollars for a down payment, you typically have to pay a higher interest rate. The reason is that the less you put into equity on the home, the riskier the loan is for your bank, and they will compensate for this with higher interest rates. A higher interest rate means that your loan will be more expensive over time, which costs you more money in the long-term. If you cannot afford to make a down payment on your home I would recommend waiting to purchase.
Are You Okay with Never Seeing Your Rent Money Again?
The thing about rent is that once you pay it that money is gone forever. You are paying the owner of the home for the privilege of living in that space. It’s different when you own the home. Assuming that you have a mortgage that you pay into monthly, the money that you put in towards the principal balance becomes your equity in the house. In other words, you are investing your money in your home, and the only money lost is what you pay in interest. This is one of the most common arguments for home ownership that I hear, and it’s a pretty compelling one. Keeping your money will always be more appealing than spending it.
What Are Your Stability Needs?
Renting comes with its own unique risks. When you have a landlord, you are at their mercy to a certain extent for your stability. They may decide not to renew your lease, or may even decide that renting isn’t for them and sell the property. This almost happened to my wife and me. We were looking at a house to rent and were informed the day before signing the lease that the owner was going to put the home on the market even if we rented. While the laws in my state prevent a new owner from randomly cancelling a lease mid-term, that’s a new relationship you need to manage. My wife and I really liked the property managers we were working with at the time and got along well with the current owner. However, a new owner we didn’t know and the possibility of people walking through our house for showings didn’t appeal to us at all and we continued our search. This is something a home owner would not be at risk for.
As I mentioned before, there is no cookie-cutter answer to the question of whether renting or buying is the better option. It depends completely on what you’re looking for in a housing experience. If flexibility and protection from certain financial emergencies is your priority, then you should probably rent for the time being. If you have no intention of moving in the near future, want to keep your money as an investment and can afford to make a down payment, then ownership may be in your best interests. Don’t let anybody try to convince you that only one way is best.