Buying vs. Renting a Home

The decision to buy or rent a home is not one to be taken lightly. It will affect your lifestyle and your savings. A home is one of the largest purchases most of us will make in our lifetime. It’s no wonder that the conversation around buying vs. renting a home ignites a passionate debate. Does it make more sense to purchase a home or should you rent one? Both choices have valid points, so there is no “right” answer. If you’re weighing your options of owning versus renting, consider the following factors before you sign on the dotted line.

Buy or Rent a Home

Rental Costs vs. Buying Costs

Let’s say you have your eye on a home and you can either buy it or rent it. Your cash outflow will be lower if you rent vs. buy.

Rental Costs

Costs include your monthly rent, security deposit, and utilities. In some cases, the tenant is responsible for maintenance costs such as snow removal or mowing the lawn.

Home Ownership Costs

Owning a home carries significantly larger cash outflows. It starts way before that when you’re in the home purchasing phase.

One Time Home Ownership Costs:

There are several one-time homeownership costs, some of which do not build equity.

  • You’ll need a down payment, which can range from 3-20% of the total cost of the property.
  • To purchase the home with a mortgage, you’ll have to pay a mortgage origination fee. This is the fee paid to the lender to process the new loan.
  • There may also be closing costs and realtor or lawyer fees you may be responsible for paying.

Home Ownership Monthly Expenses:

These include mortgage interest, homeowner’s insurance, property tax, and HOA. Homeownership also means that you’re responsible for all utilities, repairs, and maintenance.

To better understand the true costs of owning vs. renting a home, take a look at the following articles:

Another great resource is this calculator which tells you how much house you can afford. This tool may be helpful when deciding to purchase a home. It generates a more accurate estimate of the finances for your future homeownership.

The decision boils down to the following question. Do you want to pay less per month for housing, or more in costs but have equity in your home?

Opportunity Cost: You Can Invest the Difference

Some people will tell you that with renting you are simply throwing away the money instead of building equity. This is not correct as you can invest the difference between rental costs and home ownership costs and reap the rewards of compound interest.

If you decide to buy a home, you lose the opportunity cost of investing more money into your retirement account where you can take advantage of compound interest and TVM.  (Opportunity cost is the cost of the options you didn’t take when you choose to do something else).

It is also very hard to make money on the home you are living in unless you sell it and move to a different location.

Flexibility vs. Stability

Whether you value flexibility or stability will help determine which home situation may be more appropriate for you. From this viewpoint, home ownership is less of a financial decision and more emotional.

Owning a home brings more stability. In most normal situations, you can’t be forced out of the home by a third party (mortgages and some Home Owners’ Associations aside). This is your space to modify and utilize as you like, subject to local laws. For example, some landlords prohibit renters from subletting their homes. Some renters are not allowed to have long-term or short-term boarders. When you own your home, you can have as many roommates and Airbnb guests as your local laws allow.

You may not feel like you’re ready to settle down into one space. If you value the ability to move to a new location quickly, renting may be preferred. You do lose the ability to modify your home. Many landlords prohibit modifications that are expensive to remediate the home for their next tenant. The financial benefits and freedom to move as you please may be tempting to many people. You can move for a job, for a new romance, or simply because you want to with no rental consequences.

Conclusion

Whether you choose to buy or rent your home is not only a fiscal question but also one with emotional roots. You need to consider your level of comfort with each option and how both choices fit into your life’s plans. There are no right answers, only the right answer for YOU.