Recently I published an article titled The True Costs of Owning a Home: It May Surprise You. The purpose of that article was to shed a light on all of the costs (including some hidden costs) that come with being a homeowner, rather than to debate whether it’s better to buy or rent.
In this article, I’d like to discuss the pros and cons of buying a house and the pros and cons of renting. Hopefully, this will help you to make the best decision for your own situation.
For some background, my wife and I have been homeowners for the past 12 years. I bought a home mostly because I assumed it was the smart thing to do, based on advice everyone had given me throughout my life.
Through the experiences of buying, owning, and eventually selling a few houses, I’ve seen that there are plenty of downsides to owning a home as well. I like to think I’m fairly neutral in the buy vs. rent debate. I choose to own a home, but I don’t think it’s the right decision for everyone, and I’d like to present a realistic and balanced view on the topic so you can make an informed decision about what is right for you (and your family, if applicable).
Other articles in this series:
- Considering Moving? Here are the Costs of Buying and Selling a House
- The True Costs of Owning a Home: It May Surprise You
- Realities of Mortgage-Free Living
Should I Rent or Buy a Home? Factors to Consider:
When you’re trying to decide between buying a house or renting, here are some of the most important things that you should consider.
1. How Long Do You Plan to Live in the Home?
The most important factor in the buying vs. renting decision is how long you plan to live in the home. As a general rule of thumb, if you plan to live in the house for less than 5 years, you will be better off renting. And if you are in the house for more than 5 years, you will be better off buying.
There are significant costs involved with buying and selling a home, and typically you will need at least 5 years in order to build up enough equity to break even with those costs. Of course, there are a lot of variables here, like whether home prices are increasing or decreasing during this time frame.
Since it’s difficult to predict what will happen with home prices and the overall economy, 5 years is a good general rule that you can go by. Of course, that doesn’t guarantee anything, but it’s a good starting point for your decision.
2. How Much Debt Do You Have?
If you have consumer debt like credit card balances or personal loans, you should pay off that debt before buying a home. It would be great if you can pay off other debt like car loans and student loans before buying a home, but that’s not always possible.
If you currently have debt, keep in mind that adding a mortgage is only going to make things harder. Not only will you be adding more debt, but you don’t want to run the risk of not being able to pay your mortgage and losing your home.
3. Do You Have an Emergency Fund?
An emergency fund is savings that is set aside strictly for unexpected expenses. Emergency funds can be lifesavers if you lose your job or have some type of medical or family emergency. Without an emergency fund you could be forced to rack up credit card debt, borrow from a 401(k) plan, take out a personal loan, or miss payments on your bills.
How much you should have in an emergency fund will depend on your situation. If you provide for a family (especially in single-income households) or if you have an unpredictable or unstable income, you should consider having a larger than average emergency fund.
For many people, having enough money in an emergency fund to cover 3-6 months of living expenses is sufficient. My wife and I prefer to keep 1 year of living expenses in an emergency fund because we are a single-income family of four, and being self-employed, my income is unpredictable.
It’s best to have your emergency fund in an account that can be accessed quickly and easily. I use and recommend a high-yield savings account at CIT Bank, where you’ll earn an interest rate that is more than 20x the national average.
4. What’s More Important to You: Stability or Flexibility?
Owning a home gives you a little more stability as compared to renting. When you’re renting, your landlord can increase the rent and there is little you can do about it. The property could also be sold and the new owner could force you to leave. There are a lot possible scenarios like this where you might need to move even if you don’t really want to. As a homeowner, you have more control and stability.
One of the most commons reasons for stability involves kids and school districts. When you buy a home you can choose the school district that you want for your kids, and you can stay there. Renting and moving multiple times may mean that your kids have to change schools.
On the other hand, renting gives you more flexibility. As a renter, you won’t have money tied up in a home or property and you won’t need to sell a home before you can move. You can easily and quickly move, regardless of whether it is across town, to a different state, or to a different country.
There is no right or wrong choice, it’s just a matter of which is a better fit for your lifestyle and your personal and family situation.
5. How Much Do You Have Saved for a Down Payment?
Your down payment is a big factor for a few different reasons. First, the amount you put down will impact your monthly payment. The more you put down, the lower your monthly mortgage payment will be.
Second, a larger down payment gives you instant equity in the home. With a small down payment and less equity, you’ll be at a greater risk if the property value drops. If that happens, you may not be able to sell the house because you’ll owe more on it than the amount that you can get from a sale.
Third, if you put less than 20% down, you’ll generally have to pay private mortgage insurance (PMI) on top of your monthly mortgage payment. PMI is insurance for the lender to protect them against you defaulting on the loan. PMI does nothing for you as the borrower, it just increases the amount that you pay each month.
I recommend waiting until you have enough saved for a 20% down payment, if at all possible. Where you live will have a huge impact here. In lower-cost of living areas it’s pretty realistic to save up a 20% down payment, but if you’re living in a city like San Francisco, 20% may be unrealistic.
6. How is Your Credit?
Your credit score and payment history can have a big impact on your ability to qualify for a mortgage, or the interest rate that you’ll have to pay. If you have bad or limited credit, you’ll probably be better off renting while you work to improve your credit.
You can get a copy of your credit report for free once per year at AnnualCreditReport.com. Getting your credit report from this site will not hurt your credit score.
7. Can You Afford to Buy a House That Meets Your Needs?
Don’t buy a house that doesn’t meet your needs simply because you want to own a home. If you do that, you’ll probably wind up moving in just a few years and you’ll be at risk of losing money.
As a general rule of thumb, your mortgage payment (including property taxes) should not exceed 25% of your monthly take-home pay. Of course, that’s just a general rule, but it gives you a good starting point to know what you can afford and what might stretch you too thin.
If you need some help creating a monthly budget, see my article How to Create a Budget That Works. In that article you can download a free spreadsheet template for creating your own budget, or you can enter your email address below to get the template.
8. Will You Be Able to Afford the Maintenance and Upkeep of the House and Property?
The down payment and monthly mortgage payments are two important costs that you’ll need to consider, but there is much more to owning a home. As a homeowner you will be responsible for taking care of the home and property, and that costs money.
A good estimate for maintenance and upkeep is 1-2% of the house’s value each year. For example, if the house is worth $100,000 you should expect to spend about $1,000 – $2,000 per year on maintenance and upkeep. For much more on this topic, please see The True Costs of Owning a Home.
This is one of the major perks of renting. As a renter, it won’t be your responsibility to pay for maintenance to the house.
9. Do You Have the Time and the Desire to Maintain the Home and Property?
Not only does maintenance and upkeep cost money, but it will also take up some of your time. Some homes will take more time than others, but you’ll need to be able and willing to work on the house regardless.
A few years ago my wife and I moved from home that we had bought as a new construction (we lived in the house for six years) and moved into a home that was almost 30 years old. There is a MAJOR increase in the amount of time and money that we need to dedicate with the older home. We also have a property that involves a lot of landscaping and yard work, and I spend a lot of hours every season of the year working in the yard.
Depending on your lifestyle, you may have no desire to spend time working on your house or property. If that’s the case, renting may be the best option for you.
As a homeowner you can pay other people to do a lot of the work for you, but of course that is an additional cost that you will need to consider in your budget.
10. What is Your Family Situation?
Family factors can also play a big role in the rent vs. buying decision. There are a number of ways this can influence your decision, but here are a few questions to ask yourself:
- Is it likely that you’ll have (more) kids in the next few years?
- Will you have any kids moving out of the house in the next few years?
- Is it likely that parents, in-laws or other family members will be moving in with you?
You need to think about these factors to make sure that any house you buy today will continue to meet your needs in the near future. You don’t want to buy a house that meets your current needs, and then outgrow it in two years.
Likewise, you don’t want to buy a house now, and then have it be too big after your kids move out in a year.
Remember that you’ll probably need to live in the house for at least five years in order to make buying it a good financial decision. If your family situation means that your needs will drastically change within the next five years, you will probably be better off renting or staying where you are now as long as possible.
11. Where Do You Want to Live?
The town and neighborhood of your choice can also impact whether you decide to buy or rent. There may be a certain neighborhood you want to live in that would require you to buy a home. Or, maybe you prefer to live in an urban area where there are a lot more rentals available.
Other factors to consider:
- Will you be able to afford a home in the neighborhood of your choice?
- Will buying a home force you outside of a city and lead to a longer commute?
Think about the location of a home that you would buy or rent and all of the ways that the location could impact your life.
Advantages of Owning a Home
As a homeowner, you’ll have the freedom to make changes to the home. You won’t need to ask a landlord for approval or permission.
When you own a home you’ll have more stability and you’ll be more likely to stay in that location for a longer period of time. This is often a significant factor for parents who want to keep kids in a certain school or district.
3. Potential to Build Equity
As a homeowner, you will be able to increase your net worth if the home/property value increases. For many people, this is a primary motivating factor in deciding to buy a home.
4. Make it Suit Your Needs
This goes along with the first point about freedom. The home you buy may not meet your needs at the time you buy it, but you’ll be able to make changes and improvements so it can suit your needs. This could include removing walls, re-purposing rooms, building additions, remodeling, and other types of rennovations and changes. As a renter, you would be very limited in the types of things you could do.
In general, owning a home will usually give you a little more privacy. Many rentals are apartments, condos, and townhouses with shared walls and close quarters with neighbors. Owning a single-family home gives you more space and privacy.
Of course, it’s possible to rent a single family home or buy a condo or townhouse, so this won’t always apply. It’s a generalization, but in many cases it’s true.
6. Potential Tax Benefits
The interest you pay on a mortgage can be tax deductible. Traditionally, this has been one of the most popular arguments in the case for homeownership, but it may not be as advantageous as you think. The tax laws introduced by President Trump have an impact in this area, most significantly because of the increase in standard deduction that is available. This topic is far too detailed for the limited space available in this article, but for more details, you can read How Homeowners Win and Lose Under the New Tax Law at MarketWatch.
7. Pride of Ownership
For many people, owning a home is something desirable and something that is important to accomplish.
Disadvantages of Owning a Home
1. Big Upfront Cost
There are significant costs involved with buying a home. The closing costs and fees can be surprisingly high, plus you’ll need to make a down payment as well. The big upfront cost is something that you may not be able to afford. And even if you can, it may be something that you would rather avoid.
2. Financial Risk
While building equity is one of the goals of being a homeowner, there is no guarantee that your property value will increase. When you buy a home you’re at risk of losing money if property values decrease. The longer you own the home, the lower this risk will be.
3. Your Money May Be Better Used for Other Investments
The money that you use for a down payment and closing costs to buy a house is money that you won’t be able to use for other investments. While the value of your home may increase, it’s possible that you could get a better return with other investments.
4. Locks You Into a Location
The flip side of stability is that it limits your flexibility. Owning a home essentially locks you into that location. If you want or need to move, you’ll need to pay realtor fees to sell the house, plus other costs associated with moving and buying another home. It’s not that you can’t move if you own a home, just that it will be expensive. You’ll also need other buyers to have an interest in your home in order to sell it.
5. Maintenance and Upkeep Costs
Owning a home is expensive. There are a lot of costs associated with maintaining a home, especially if it’s an older home or a large property.
6. Time Required for Maintenance and Upkeep
Aside from the cost of maintaining the home, you’ll also need to invest some of your time. Depending on your situation, this may or may not be something that you are willing to do.
7. You’re Responsible
As a homeowner, there is no landlord to call when something needs to be fixed. You’re the one who is responsible. You’ll need to fix it yourself or hire someone to come take care of it.
Advantages of Renting
1. Much Lower Upfront Costs
As a renter, you’ll typically pay the first and last month’s rent when you move into a new apartment or house. Of course, the details can vary depending on your lease agreement, but the upfront costs of renting are much, much lower than buying.
2. Greater Flexibility
Without owning a home, you’ll have much more flexibility in terms of when and how frequently you can move. Finding another place to rent is generally faster, easier, and cheaper than buying a home. Without the costs of selling a home or the upfront costs of buying a home, there is much less of a downside to moving frequently. And when you move, you won’t need to wait for someone else to buy your current house. Depending on your lifestyle, this can be a huge advantage for renting.
3. You’ll Have More Money for Other Investments
Since you won’t need to spend a lot of money upfront on closing costs or a down payment, you’ll have more money that you can use for other things, including investments. You may prefer to invest your money in other ways aside from a home.
4. You’re Not at Risk if Property Values Drop
As a renter, you’re not at risk of losing money (or net worth) if the value of your home decreases. If you’re planning to live in a home for a shorter period of time (like 5 years or less), this becomes a big deal.
5. Lower Costs if You Need to Move
When you do move, it’s a lot cheaper to move if you’re renting. The actual moving costs may be the same, but for homeowner’s, moving usually involves selling one house and buying another.
6. You’re Not Responsible for Maintenance and Upkeep
If you don’t want to have to spend time or money taking care of a home or property, renting is probably the best choice for you. You can let the landlord worry about that.
Disadvantages of Renting
1. Risk of Increasing Rent
As home and property values increase, rent prices also will increase. As a homeowner, your mortgage payment will remain constant (unless you refinance). But as a renter, the monthly rent will increase over time.
2. Less Stability, Likely to Move More Frequently
Renters tend to move a lot more frequently than buyers. That’s partly because it’s cheaper and easier to move as a renter, but there could be other reasons like big rent increases or bad neighbors on the other side of the wall.
3. You’re Not Building Equity
If you’re renting, you won’t be growing your net worth through increased equity in your home. Of course, as was mentioned earlier, you can use your money for other investments.
4. You Won’t Have Freedom to Do What You Want with the Home
As a renter, you will not has as much freedom in terms of what you do with the house or apartment. Your landlord may allow you to paint or make minor changes, but any significant changes are not likely.
5. You May Be Limited to Certain Neighborhoods or Types of Homes
You may or may not be able to find a place to rent in the neighborhood where you want to live. While there are rentals of all shapes, sizes, and types available, most rentals are apartments or condos (although they can be similar, they are not the same – see Condo vs. Apartment for an explanation).
What’s Best for You?
In the end, there is no right or wrong decision when it comes to the renting vs. buying debate. You simply have to decide which is the best fit for your own situation. Hopefully, the details covered in this article help you to make an informed decision.